Cost concept, Accounting Basics

The resources as machinery, property, buildings and land rights etc. such a business owns are termed as assets. The money values allocated to assets are derived from the cost concept. Such concept states that a benefit is worth the price paid for, or cost incurred to obtain it. Hence, assets are recorded as per their original purchase price and this cost is the origin for each subsequent accounting for the asset. The assets demonstrated on the financial statements do not essentially indicate their present market worth or market values. It is contrary to what is frequently believed through an uninformed person reading the report or statement. The term 'book value' is utilized for the amount demonstrated in the accounting records.

In the case of specific assets, the accounting values and market values might be same; cash is an obvious illustration. In general, the longer an asset has been owned through the company the less, are the chances such accounting value will correspond to the market value.

The cost concept does not imply that all assets continue on the accounting records at their original cost for always to come. The cost of an asset which has a long but restricted life is systematically decreased throughout its life by a process termed as 'depreciation' that will be discussed at several lengths in a subsequent unit. Suffice it to imply that depreciation is a process through which the cost of the asset is slowly reduced or written off through allocating a part of it to expense in all accounting period. It will have the effect of decreasing the profit of every period. In charging depreciation the intention is not to modify depreciation identical to the fall in the market value of the asset. While, there is no association among depreciation and changes in market value of the assets. The reason of depreciation is to assign the cost of an asset over its helpful life and not to adjust its cost in order to bring it closer to the market value.

The major argument is that the cost concept meets all the three fundamental criteria of relevance, feasibility and objectivity.

Posted Date: 4/3/2013 5:53:23 AM | Location : United States

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