Over decade, referring to Evi Rahmawati (2006) accountants have been utilizing the

HCA concept for measuring ,reporting and recording which has been classified as the
fundamentals basic.Historical cost expressed that the asset as well as the liabilities of
a firm ought to be presented at their historical cost within an accounting period. In
other words, it is the amount that paid to accquire an asset yet the value may be
different from current market value (What is Historical Cost ,n.d). As managers make
decisions related to the future commitments , they need data on past transactions.
Hence, historical cost has become the most widely used accounting method compared
to others as it is an simpler method of valuation.

However , as each coin has opposite sides, historical cost concept does not express the
true value of a firm‘s assets. This scenario may affect in generating useful information
to users of financial statements as the financial assets in the balance sheet are
difference from true value. As the concept is fixed, it only considered the allocation of
cost yet not the value of an asset thus it is defined to be "with a view behind" over a
period of time.In addition, historical cost accounting method is lack of relevance
which is also an important element of financial reporting for decisions makers. As we
realized that , it normally requires estimation of the future when making a
decision.The historical cost accounting is on the assumption that money is a stable
unit of measurement .As historical cost method is based on the past values , thus it
cannot provide the most applicable information for the future (Advantages and
Disadvantages of Historical Cost Accounting,n.d).

Other than that, unrealistic profit is also another limitations of using historical cost
method concept.Under the concept, due to the income statement does not show the
real profit of a firm as the revenues are recorded on current price while expenses are
recorded at historical cost, it will lead to an overstatement of revenue in the results
during inflation (Advantages and Disadvantages of Historical Cost Accounting, n.d).
Definitely , this could affect users of financial statements in decision making. In
addition, according to Zulkifli (2012) another criticism of historical accounting
method is the inflation of time .It refer to an asset bought today may be expensive
future. Charles (2012) indicated that the validity of historic accounting lays on the
suspicion that the currency in which transactions are recorded stays stable.
Unfortunately , according to Evi Rahmawati (2006), not all the companies in the
market have the same effects of inflation, thus it become useless information for
decision makers when comparing corporate performance.Besides, managements
required to have historical cost accounting information in order to evaluate their past
performance in the past event.Therefore, they can make a right choice for their future .
HCA basis requires generally assets and liabilities ought to be estimated and revealed
at their acquisition price (historical price). However, referring to Evi Rahmawati
(2006) ,this can be easily proven wrong that HCA has lost its usefulness for user
decision making and also lost its value relevance due to the changes in the economy,
particularly in a high tech environment.

Reference :

1. https://businessjargons.com/historical-cost.html

2https://www.mbaknol.com/financial-management/advantages-and-disadvantages-of-
historical-cost-accounting/

3.http://journal.umy.ac.id/index.php/ai/article/viewFile/887/987

4.http://ijbssnet.com/journals/Vol_3_No_7_April_2012/32.pdf

5.http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.909.4135&rep=rep1&typ
e=pdf

Reference List:

1.What is Historical Cost ,n.d.,Business Jargons, viewed 20 September 2018,

<https://businessjargons.com/historical-cost.html>.
3. Advantages and Disadvantages of Historical Cost Accounting,n.d., MBA
Knowledge Base, viewed 20 September 2018,
<https://www.mbaknol.com/financial-management/advantages-and-disadvantages-of-
historical-cost-accounting/>.

2. Evi Rahmawati, E 2006, ’Support and Against Historical Cost Accounting: Is it

Value Relevance for Decision Making’, Vol. 7 No. 1,pp.113-125

5. Zulkifli, M 2012, ’Comparative Analysis of Current Values and Historical Cost in

Business Zakat Assessment: An Evidence from Malaysia’,Vol. 3 No. 7,pp.288

6. Charles, C 2012, ’Comparative analysis of fair value and historical cost accoutning
on reported profit : A study of selected manufacturing companies in nigeria’,
vol.3 ,no.8,pp.137