Cost concept in accounting policies recognizes the assets are recorded at the price paid to buy them. Transactions are recorded in the books at the price paid that is the cost. The cost has been the most common valuation concept in the traditional accounting structure.
Accounting Policies Description
In accounting policies assumptions are assets and expenses are bought at cost price. It means original amounts paid for assets and expenses first should be recorded in relevant account. The value of assets is to be determined on the basis of historical cost. Transaction is entered in the books of accounts at the amount actually involved.
For example, furniture is purchased for $50,000/- and it’s worth may consider $1,00,000/-, But the accounting entry in the books of account will be made with $50,000/- or the amount actually paid for assets purchased. It does not mean that the assets will always be shown at cost. The assets may be recorded at the time of purchase but it may be reduced its value be charging depreciation as expenses of the year in the profit and loss account.
The recording of the assets may not be reflecting the current market value. The value of assets are recorded in the asset account at original purchase price it helps in important decision making regarding to assets valuation or it utilization capacity.
This concept implies that all properties of the business entity are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like computer, land & building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them.
In Accounting Policy Manual that if the business entity does not pay anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price and recorded as assets of the entity. It requires the asset to be shown at the price it has been acquired, which can be verified from the supporting evidence. In this this concept helps in calculating depreciation amount on fixed assets to arrive the actual amount of the asset. Free Accounting Manuals helps you to understand better this topic.
The effect of this principle in accounting policies is that if the business entity does not pay anything for an asset, this item will not be shown in the books of accounts. Accounting policies requires asset to be shown at the price it has been acquired, which can be verified from the supporting documents – objectively verifiable.
It is also helpful in calculating depreciation on fixed assets. It provides the reliable objective evidence for recording and depreciating the assets. These are used basis for valuation of business and assets of the entity.
Originally posted 2013-10-10 15:16:00.