Two retail businesses A and B have a similar trade in simila

Two retail businesses, A and B, have a similar trade in similar shops in similar areas.

A purchased its store in 1950 for €5000 and B bought the store in 1990 for €105 000.

Both companies constantly prepare their accounts on principles of historical cost and have identical operating profit.

What extent resulting accounts give a true (and fair) representation of the relative performance of the two companies?

Solution

Both the businesses, having similar shops in similar area generates identical operating profits.

Thus the performance of both the businesses are same. But due to the non operating expense of depreciation

Net Profit of Business A   will be higher than that of Business B.

Reason: Both the businesses depreciates it\'s store on the written down historical cost. As Business A\'s historical cost of the store is lower than that of Business B, therefore the Deprecation charged by Business A will be less than that of Business B.