Falcon Trading has applied the historical cost concept in its accounting records.
According historical cost concept, the value of assets such as inventory, building, and land should be recorded at the original value instead of current market value. The disadvantage of the historical cost concept is the value of assets is recorded inaccurately. The value of assets will change over the time due to inflation. For example, Chua carried out physical inventory count on 31 December 2017 and revealed that closing inventory of RM5,200 at cost price and RM5,900 at market price.
The inventory shall appear on the balance sheet at RM5,200 not at RM5,900.