Usefulness of Historical Cost Concept
The historical cost is the cost at date of acquisition and when it incurred. It is easy to use and simple to apply because do not required to reference to market values. Users no need to do market research to get the current price or market value of the financial items as the historical cost is not subjected to any future changes. They can just record down the original cost of the financial items in financial reports. Secondly, historical cost concept is also easy to understand. Users can easily understood and interpret financial reports well even though they do not have any financial background.
Limitation of Historical Cost Concept
Historical cost concept is fixed, which means it is recorded based on the original cost from the invoice or receipt. It does not take inflation or changing prices in the account. During the inflation period, the price of the assets is different from changing, it reflects more differ between original price and current price, it does not seem sensible to record the value of assets by using the historical cost accounting concept when facing changing price. Secondly, historical cost concept does not show the true value of company’s assets. It recorded all the assets at the price at the date it incurred. It is unrealistic fixed assets values, which mean the balance of the financial assets are different from the true value.
Usefulness of Accrual Concept
Accrual accounting concept is more accurate, more faithful financial statements that constitute better representations of actual circumstances than its main competitor. It produces more accurate gauges of entities’ performance in any time period. On the contrary, due to the collection of cash and cash equivalents not aligning with the actual timing of sales, the use of cash basis can lead to distortions.
Limitation of Accrual Concept
The most important issue in accrual concept is that it requires transactions must be recorded at the times when it occur. Since invoices do not coincide with actual events, this approach necessitates some estimation and guesswork on the part of accountants working under accrual basis concept. Furthermore, an entire set of rules and regulations have grown up and around these uncertainties in order to guide their accounting, which means that accrual basis accounting is harder to perform than cash basis accounting.
Usefulness of Consistency Concept
The purpose of the consistency concept is to assure that financial statements can be easily compared period to period, and therefore to encourage that the same accounting principles be used from year to year. Consistency concept is flexible. The Institute of Chartered Accountants of New England and Wales points out that this concept are better suited to help accountants respond to rapid changes in a business environment. In contrast, an accounting principle or idea can be applied to new types of transactions or financial instruments immediately.
Limitation of Consistency Concept
Complying with accounting principles is more complex and time consuming. If companies are required to constantly interpret principles, they need accountants with vast experience and an expert understanding of accounting frameworks. Work that was previously done by a lower level accountant has to be handled by a higher level accountant, and more time may be needed to come to a conclusion.
Companies are constantly accused of misstating financial information, but asking judges and juries with no financial experience to interpret accounting principles during enforcement cases may be a bad idea. Sue Anderson, program director for CPE Link, points out that it is hard for courts to come to a conclusion based on explicit accounting rules and it would be even worse with accounting principles.
Usefulness of Historical Cost Concept