Historical Cost Accounts – Disadvantages

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November 12, 2020 at 8:49 am #594771
JyoKm
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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
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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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