Historical cost accounting, which assumes money holds a constant purchasing power, was an accepted method of business accounting for decades. Inflation, volatility in exchange rates, instability in price levels and technological and social evolution in modern economies, however, led several contemporary models to challenge the traditional principles of accounting. Continuously contemporary accounting, otherwise known as CoCoA, is one such popular contemporary accounting theory.
A Continuous and Current Accounting System
According to continuously contemporary accounting -- put forth by an Australian researcher Raymond Chambers -- the purchasing power of money isn't constant but is current and continuously changing. Given the evolving environment in which firms and businesses operate, according to the model, the monetary worth or the net realizable value of a business is the current cash equivalent of its assets. It's an accounting system that measures assets and liabilities at their current cash price, for example, the net realizable value of an asset if sold in the current business conditions.
An Adaptive Accounting System
As per CoCoA, businesses must adapt to the evolving ecosystem in which they operate, and therefore so should their accounting practices. For a firm, adaptation implies the disposal of assets deemed unfit and the acquisition of assets more suited to the new environment. Therefore, the objective of accounting should be to offer the current cash price of assets to aide a firm in better decision-making. CoCoA insists, the financial statement of a business should include the current predictive selling prices of each of the assets and therefore profit should be calculated as the change in the firm’s adaptive capital during the period.
Strengths of the Accounting Model
CoCoA is an easy model for accountants to employ in developing balance sheets and financial statements. The statements continuously advise the firm on the assets necessary to sell and buy and, therefore, help the entity to survive in a competitive business environment. Unlike the historical cost system, where there is a greater rate of error, predicting the allocating costs for depreciation is much simpler and more accurate under CoCoA. Because the CoCoA balance sheet estimates what the firm would receive if it sold each of its assets on a current date, the reports are a useful guide for shareholders to asses investment risks and benefits.
Weaknesses of the Accounting Model
CoCoA demands a fundamental shift in accounting practices, from a cost based system to exit price system, therefore most business are still reluctant to use CoCoA. An asset may have a low selling price in the market, but may be of high value within the firm. The CoCoA balance sheet fails to account for the internal value of the asset and only measures it with the exit price value in the market. While CoCoA emphasizes the need for an entity to adapt to its environment, it fails to take into account the influence an entity may have on its environment. For example, a high performance asset within the firm may over time increase its selling price in the market.
- Journal of Accounting; Chambers Continuously Contemporary Accounting
- Sociological Sites/Sights; Deconstructing an Accounting Paradigm
Kiran Bharthapudi has more than seven years of experience in print, broadcast and new media journalism. He has contributed to several major news agencies, including United Nations radio, BBC online and "Consumer Reports" magazine. His articles specialize in the areas of business, technology and new media. He has a Ph.D. in mass communications.