What is Cost Concept in Accounting?

What is Cost Concept in Accounting?

Cost concept in accounting states that the assets should be recorded at the cost at which they are acquired by the business, i.e. historical cost. Assets in the balance sheet should show the acquiring cost unless otherwise stated. Under the cost concept of accounting, all the assets are recorded at the original cost irrespective of market value. This concept is also known as the Cost Principle or Historical Cost Concept. This concept focuses on objectivity and reliability in financial reporting, as the historical cost is verifiable and less subjection to estimation....

Features of Cost Concept

1. Historical cost: Under this concept, assets are initially recorded at the actual cost incurred to acquire them. This cost includes the purchase price, taxes, transportation costs, and any other expenses directly attributable to bringing the asset to its present location and condition....

Examples of Cost Concept

If a company purchases a piece of machinery for $50,000, it will be recorded in the balance sheet at $50,000, the same as its historical cost. A building bought for $1 million will be recorded at $1 million, even if its market value increases or decreases....

Advantages of Cost Concept

1. Reliability: The cost concept provides a reliable and objective basis for recording assets, which enhances the credibility of financial statements....

Limitations of Cost Concept

1. Value Relevance: Critics argue that historical cost may not reflect the true economic value of assets, especially when their market values change significantly. This can lead to an understatement of the asset value on the balance sheet....