Accounting Cost Concept

The accounting cost concept dictates that assets are recorded in the accounting books at their purchase price, which includes acquisition, transportation, and installation costs, rather than their current market value. Therefore, fixed assets such as buildings, machinery, and furniture are documented at their original purchase price.

For instance, if ABC Limited buys a machine for ₹300,000, spends ₹5,000 on transportation, and ₹7,500 on installation, the machine will be recorded at ₹312,500 in the books. This total amount is known as the historical cost. Even if the machine's market price drops to ₹290,000, it will still be recorded at the historical cost.

For new assets, the cost means the original purchase price, while for used assets, it means the original cost minus depreciation. Consequently, this concept is also called the historical cost concept.

The implication of this concept is that any asset not acquired through a transaction will not be reflected in the accounting records. For example, goodwill will only appear in the accounts if it has been purchased.

The significance of the Accounting Cost Concept includes:

• Assets are shown at their acquisition price, which can be verified with supporting documents.

• It helps in calculating depreciation on fixed assets.

Read the next article to learn more about the Dual aspect concept.