The Importance and Purpose of Commercial Accounting

The Importance and Purpose of Commercial Accounting

In regard to the fundamental accounting concepts, there are also accounting conventions. Of these, the most important and widely used is the historical cost convention. Historical cost convention The historical cost convention refers to the value at which items are recorded in the accounts. Historical cost is the cost in cash terms paid for an item.

Most sets of accounts are prepared this way because it is easiest to understand, simplest to record and preserves the double entry with cash. 

 However, there are alternatives, and although these are beyond the scope of this course, they are included here for completeness • Current cost convention/other inflation accounting conventions.

In inflationary environments, the use of the historical cost convention produces peculiar results where an entity might have substantial assets, but these are carried at a very low value in the accounts.

To address this problem, several conventions have been developed to include the effect of inflation in the accounts. These conventions are all quite complex and difficult to apply and are not considered further in this course.

 • Cost or valuation.   More common is a form of modified historical cost convention where most assets are carried at historical cost, but some are revalued from time to time. The most common assets for this type of treatment are current financial assets and certain types of property. Concepts of value – fair value, value in use, carrying value.   While discussing these matters, it is relevant to consider some terms which accountants use to approach the question of value.