The system of accounting in which assets are valued and depreciation allowances are calculated for firms using the prices paid for assets when they were first bought or built. The merit of this system is that it uses prices based on actual market transactions; any other method of accounting for assets involves using valuations not based on market transactions. Historical cost accounting has the drawback that in a period of sustained inflation it systematically undervalues assets, and calculates depreciation allowances well below the replacement costs of capital goods, so that profits are systematically overestimated.