Accounting Principles Frameworks And Assumptions Assessment Answers

Discuss about the Accounting Principles Frameworks and Assumptions.

Answer:

Introduction:

The current market value is not reflected in the historical cost of the assets. As per the historical cost method, all the assets and liabilities are recorded based on their value at the time of acquisition (Academia.edu 2016). Various items of an organization are measured in different ways under the historical cost method. In case of the measurement of inventories, the values of the inventories are written down. In case of the valuation property, plant and machinery, there are some costs that are added to the original cost under the historical cost method. They are import duties, non-refundable tax of purchase, rebates, trade discounts, installation charges, maintenance charges and many others. There are certain financial instruments that are recorded based on historical cost. The International Accounting Standard Board (IASB) has introduced an alternative to the historical cost accounting that is Capital Maintenance in Units of Constant Purchasing Power (Quora.com 2016).

There are many advantages of the historical cost method. Objectivity is the most important advantage of historical cost accounting as it helps to record the original cost of the assets at the time of purchase. As a reason of this process, there is not any scope of manipulation as all the data and information about the asset can be verified by original documents. Secondly, historical cost accounting is easiest and cheapest method of valuation of assets and liabilities. As the original value is already recorded, the accountants have to do less estimation for the values. Reliability is the most important advantage of historical cost method as per IASB. All over the world, historical method is considered as more reliable than any other valuation like fair value. As any coin has two sides, historical cost methods also has some disadvantages. The first disadvantage is that historical cost does not reflect any recent change in the current value of the assets or liabilities. Secondly, historical cost method does not keep any record of any opportunity cost in the use of the old assets. The third disadvantage is that historical cost method does not record any kind of loss of real value of nominal monetary items. In spite of the presence of disadvantages, it can be said that the historical cost method is an effective way for the valuation of assets and liabilities as the proportion of advantage exceeds the proportion of disadvantages (Responsive.co.nz 2016).

There are many advantages of the business entity concept and each advantage is crucial for the organizations. The first advantage of business entity concept is that this process helps to evaluate the performance of the organization. In this process, each transaction of the business is recorded in the books of both the owner and the business and the owner has the access to every information about the business. This process helps to recognize the weak as well as strong areas of the business. The second advantage is that it assists the owner of the business in tracking all the transactions of the business. These are the main advantages of entity theory. In this regard, it needs to be mentioned that there is not any disadvantage of business entity theory (Caknowledge.in 2016).

References

AccountingCoach.com. (2016). matching principle definition | Dictionary | AccountingCoach. [online] Available at: https://www.accountingcoach.com/terms/M/matching-principle [Accessed 12 Dec. 2016].

Bright Hub. (2016). The Importance of the Matching Principle in Accounting. [online] Available at: https://www.brighthub.com/office/finance/articles/117731.aspx [Accessed 12 Dec. 2016].

CAknowledge. (2016). Business Entity Concept - Complete Details - CAknowledge. [online] Available at: https://caknowledge.in/business-entity-concept-complete-details/ [Accessed 12 Dec. 2016].

Quizlet.com. (2016). Search › financial accounting theory | Quizlet. [online] Available at: https://quizlet.com/subject/financial-accounting-theory/ [Accessed 12 Dec. 2016].

Quora.com. (2016). What are the theories of accounting? - Quora. [online] Available at: https://www.quora.com/What-are-the-theories-of-accounting [Accessed 12 Dec. 2016].

Ventureline.com. (2016). ACCOUNTING THEORY DEFINITION. [online] Available at: https://www.ventureline.com/accounting-glossary/A/accounting-theory-definition/ [Accessed 12 Dec. 2016].