What are the limitations of historical cost accounting?

Historical cost accounting records assets and liabilities at their original purchase price, which can limit its relevance in the context of current market values or economic conditions. This approach does not adjust the value of assets over time to account for inflation, market fluctuations, or changes in demand, which could lead to a significant discrepancy between the recorded values and their true economic worth.

This limitation is crucial in decision-making, as stakeholders, including investors and analysts, may rely on financial statements that reflect outdated valuations. As a result, historical cost accounting may fail to provide an accurate picture of a company's current financial position and performance, inhibiting the ability to make informed investment or operational decisions based on up-to-date market realities.

Other options suggest aspects that are not inherent limitations of historical cost accounting. For example, the method does not require complex calculations for determining asset values or incorporate future inflation into asset valuation, which are not reflective of its primary challenge—keeping pace with the current market landscape.