The Importance of Accounting Cost Concept in Financial Reporting and Asset Management.
Accounting cost concept is also known as Cost Concept, It is a principle in financial accounting that states that when a company or business purchases an asset, it should record it in its books at the price it paid for the asset. This price includes not only the purchase cost but also any expenses related to transportation and installation i.e. cost of acquisition.
Let's say a company buys a machine for Rs. 100,000. They spend an additional Rs. 5,000 to transport the machine to their factory and Rs. 3,500 to install it. According to the cost concept, the machine will be recorded in the Company's books at the total cost of Rs. 108,500, which is the sum of the purchase price, transportation cost, and installation cost. This recorded cost is known as the historical cost.
Even if the market price of the machine later changes, let's say it drops to Rs. 95,000, the company will still show it in their books at the original cost of Rs. 108,500. The cost concept focuses on capturing the initial acquisition cost of the asset rather than its current market value.
It's important to note that for new assets, the cost concept refers to the original or acquisition cost. However, for used assets, the cost concept considers the original cost minus any depreciation that has been accounted for.
The cost concept has several implications in accounting:
It ensures transparency by recording assets at their documented purchase price, which can be verified from supporting documents.
It facilitates the calculation of depreciation on fixed assets. By knowing the original cost, businesses can determine the amount of the asset's value that has been used up over time and allocate depreciation expenses accordingly.
If an asset is acquired without any cost, it will not be recorded in the books. Therefore, intangible assets like goodwill, which don't have a specific purchase price, will only be shown in the accounts if they were acquired for a cost.
In summary, the accounting cost concept emphasizes recording assets at their original cost, regardless of any changes in their market value. This helps in maintaining accurate financial records and calculating depreciation expenses correctly.