What is Cost Concept of Accounting?Explanation with Example

cost concept

What is Cost Concept of Accounting?

The cost concept of accounting states that all assets are recorded at cost in the books of account. That is assets are recorded at the cost that is paid to acquire them rather than their market value.

The economic resources of an entity are the assets of the organisation. They consist of non – monetary assets such as land, building and machinery, etc. One of the fundamental concept of accounting which closely relates to going concern concept. This concept states that an asset is ordinarily entered initially in the accounting records at the price paid to require it.

However, in case of non monetary assets, the cost concept extends to their accounting subsequent to acquisition, cost continues to be the basis for all the subsequent accounting for the asset. However this is not true for all the monetary assets.

Example of Cost Concept

Suppose a business buys a plot of land for Rs 10,00,000 in the year 2016. This plot of land will be recorded in the books of account at the price paid to acquire it. Now suppose in 2017, the market value of the land rises to 12,00,000. But the land will be recorded in the books of account at Rs. 10,00,000.

Rationale for Cost Concept

The concept as it is applied to non-monetary assets provides an excellent illustration of the problem of applying three basic criterion. These criterion is used to judge the acceptability of the accounting principle – relevance objectivity and feasibility.

If the only criterion were relevance, then the application would not be defensible, Clearly investors and other financial statement users are more interested in what the business and its individual assets are actually worth today than in what the assets cost originally.

When it comes to objectivity, the concept by contrast provides provides a relatively objective foundation for non-monetary asset accounting. The concept leads to much more feasible system of accounting for non monetary assets.

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