Why the Past Matters in Accounting 🕰️
Picture this: an accountant dressed in Victorian clothes, quill in hand, writing down numbers diligently. As ancient as this image seems, the historical cost convention is an old-school rule that still rules our modern accounting books! Let’s dive into the whimsical world of historical cost and see why keeping the old info can be so gold!
What is Historical Cost Convention? 🤔
In plain English, the historical cost convention is an accounting principle where assets are listed on the books of account at the price they were originally purchased. Imagine buying a unicorn for $1,000 🦄. Regardless of the unicorn’s magical value skyrocketing to $1 million (because, well, it’s a unicorn), your trusty old account book will still say it’s worth $1,000!
Meet My Friends — Asset and Book of Account📚
- Assets: These are resources owned by a company and listed on the books, which may one day generate cash flows (ka-ching!). It could be properties, machines, or that unicorn from earlier.
- Books of Account: This is where all those valuable assets are dutifully recorded. Think of them as the diary of financial adventures.
Why Stick to Historical Cost? 🤓
The logic is simple: it’s reliable, verifiable, and avoids hyperbolic unicorn pricing wars! Plus, it’s hard to argue with hard numbers; the price you paid is what you’ll faithfully record!
pie title Asset Historical Cost Percentages
"Property" : 40
"Machinery" : 30
"Inventory" : 20
"Others" : 10
Benefits of the Historical Vibe 🎉
- Simplicity: Like that time your grandma baked cookies following a simple, tried-and-true recipe, rather than adding some complex unicorn sprinkles.
- Consistency: Your books won’t be changing with the wind or wild unicorn price fluctuations.
- Verifiability: Auditors love it because, you’ve got receipts! Historical cost can be proven with bills and purchase contracts — tangible evidence!
Real World Example and the Modified Twist 🌎
Ask any business old-timer about their expenses in ’the good ol’ days’ and see their eyes light up. You’ll get the same stories dedicated accounting professionals tell every day via historical cost. Suppose, though, there’s a modified version: the Modified Historical-Cost Convention. 🧐
