Cost Concept – Meaning of Cost Concept (All you need to know)

Cost Concept – By this concept, the value of an asset is to be determined on the basis of historical cost, in other words, acquisition cost. Hence, All the fixed assets are recorded at Historical Cost only and market value of fixed assets is ignored.

In accounting, the cost principle is part of the generally accepted accounting principles. Assets should always be recorded at their cost, when the asset is new and also for the life of the asset. Wikipedia

Cost Concept

Cost Concept in Detailed – By this concept, the value of an asset is to be determined on the basis of historical cost, in other words, acquisition cost. Although there are various measurement bases, accountants traditionally prefer this concept in the interests of objectivity. When a machine is acquired by paying Rs. 5,00,000, following cost concept the value of the machine is taken as Rs. 5,00,000. It is highly objective and free from all bias. Other measurement bases are not so objective. Current cost of an asset is not easily determinable. If the asset is purchased on 1.1.1995 and such model is not available in the market, it becomes difficult to determine which model is the appropriate equivalent to the existing one. Similarly, unless the machine is actually sold, realisable value will give only a hypothetical figure. Lastly, present value base is highly subjective because to know the value of the asset one has to chase the uncertain future.

The cost principle is one of the basic underlying guidelines in accounting. It is also known as the historical cost principle. The cost principle requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired.