Accounting Methods

Historical cost accounting
Advantages
• Historical cost accounts are straightforward to produce
• Historical cost accounts do not record gains until they are realized
• Historical cost accounts are still used in most accounting systems
Disadvantages
• Historical cost accounts give no indication of current values of the assets of a business
• Historical cost accounts do not record the opportunity costs of the use of older assets, particularly property which may be recorded at a value based on costs incurred many years ago
• Historical cost accounts do not measure the loss of value of monetary assets as a result of inflation.
Current purchasing power accounting
Advantages
• CPP method adopts the same unit of measurement by taking into account the price changes.
• Under CPP method, historical accounts continue to be maintained. CPP statements are prepared on supplementary basis.
• CPP method facilitates the calculation of gain or loss in purchasing power due to the holding of monetary items.
• CPP method uses common purchasing power as measuring unit. So, the comparative study is easy.
• CPP method provides reliable financial information for taking management decision to formulate plans and policies.
• CPP method ensures keeping intact the purchasing power of capital contributed by shareholders. So, this method is of great importance from the point of view of the shareholders.
Disadvantages
• CPP method considers only the changes in general purchasing power. It does not consider the changes in the value of individual items.
• CPP method is based on statistical index number which cannot be used in an individual firm.
• It is very difficult to choose a suitable price index.
• CPP method fails to remove all the defects of historical cost accounting system.
• The use of general price index for CPP method is questioned. While general price index deals with consumer goods, business is interested in the price movement of producer goods.
Current