Current Cost Accounting is a method of financial accounting that aims to measure the cost of an economic entity's assets and liabilities at their current market value or fair value. This approach contrasts with traditional historical cost accounting, where assets and liabilities are recorded at their original purchase or production cost.
The current cost accounting method recognizes that the value of assets and liabilities can change over time due to inflation, deflation, changes in market conditions, and other factors. It seeks to capture the economic reality of the entity's holdings by valuing them at their current market prices.
Under current cost accounting, assets and liabilities are revalued periodically, usually at the end of each accounting period. This revaluation is based on the prevailing market prices or fair values of similar assets and liabilities. The difference between the original recorded cost and the current market value is typically recognized as a gain or loss, included in the income statement.
This method provides a more accurate representation of an entity's financial position, as it reflects the true economic value of its assets and liabilities. It enables users of financial statements to assess the entity's performance and financial health in real-time, taking into account the effects of changing economic conditions.
Current cost accounting is commonly used in industries where the value of assets, such as inventory, investment securities, and real estate, can significantly fluctuate. It is also relevant in situations where there is hyperinflation or volatile market conditions.
