US GAAP

US GAAP

Historical Cost principle is the principle that is commonly used in accounting to determine all the costs involved in acquisition of an asset or a service in terms of calculating all the costs incurred in the process which is then compared with the current cost in the market (Hilton et al, 2008). It is a principle that is used by accountants to draw a comparison between the cost of an item then and the cost of the same item now, but the final submission will always give preference to the cost of that particular item the first time it was bought by the consumer. For instance, if a company buys a half an acre piece of land at a cost of $ 6,000 in 2012, and decides to buy another half an acre piece of land at a cost of $ 6,500 today, what will be projected in the balance sheet is $ 6,000.

This principle is vital in today’s accounting because of the nature of the market. Daily fluctuation in market commodities and the unstable prices of goods and services is inevitable and this is why this principle is so relevant in accounting today (Garrison, et al, 2008). One of the most important documents in any kind of business is cash flow projections. There would be no better method to report about all the assets that a company or an organization own than using the cash flow statement. It is therefore important to consider the options made available by GAAP to determine all the costs incurred in the specified period of the financial year. On a personal opinion, I would advocate for this principle to be made mandatory for two main reasons. First, it is not possible to control market prices and hence controlling the cost of acquiring assets is impossible. Secondly, the application of this principle is able to show the current market prices, hence be able to get the best timing for asset acquisition.

References

Garrison, R. H. (2008). Managerial Accounting. New York: McGraw-Hill Companies.

Hilton, R. W. (2008). Cost Management: Strategies for Busines Decisions. New York: McGraw-Hill Companies.