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Historical Cost Accounts – Disadvantages

Forums › Ask CIMA Tutor Forums › Ask CIMA F1 Tutor Forums › Historical Cost Accounts – Disadvantages

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  • November 12, 2020 at 8:49 am #594771
    JyoKm
    Participant
    • Topics: 2
    • Replies: 0
    • ☆

    Hello,

    I read in the CIMA official text that one of the disadvantages of the Historical Cost Accounts is –

    “No account is taken of the effect of increasing prices on monetary items (items designated or settled in cash)”

    Could you please explain the above point with an example? I couldn’t understand this point.

    Thanks,
    Jyo

    November 13, 2020 at 9:32 pm #594941
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7060
    • ☆☆☆☆☆

    Hi,

    If receivable/payables, which are monetary items, are started at historic cost then they are not adjusted for any changes in price, so this is a disadvantage as the purchasing power of money may have changed since it was initially recognised.

    Thanks

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