COST CONCEPT:
According to this concept fixed assets are recorded at the price at which they are acquired. This price is termed as 'Cost'. In balance sheet, however, these assets do not appear always at cost price every year, but systematically it is reduced by the amount of annual depreciation and thus they appear at the amount which is cost less depreciation. This value is called book value. Under cost concept, all such events are ignored which affects the business but have no cost. For example, the most active, important and influencial directordies, then the earning capacity and position of the business will be affected, but this event has no cost hence it will not be recorded in accounts books.
Effects of this Concepts:
According to this concept fixed assets are recorded at the price at which they are acquired. This price is termed as 'Cost'. In balance sheet, however, these assets do not appear always at cost price every year, but systematically it is reduced by the amount of annual depreciation and thus they appear at the amount which is cost less depreciation. This value is called book value. Under cost concept, all such events are ignored which affects the business but have no cost. For example, the most active, important and influencial directordies, then the earning capacity and position of the business will be affected, but this event has no cost hence it will not be recorded in accounts books.
Effects of this Concepts:
- Due to cost concept, market price is ignored and balance sheet indicates financial position on cost and expired cost basis.
- This concept is mainly for fixed assets, current assets are not affected by it. They appear in balance sheet at cost or market price, whichever is lower, though they two are acquired at cost price.
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