Cost Concept

The underlying idea of cost concept is that :
(i) asset is recorded at the price paid to acquire it, that is, at cost; and
(ii) this cost is the basis for all subsequent accounting for the asset.
When asset is recorded at cost price as said under point (i) above, the change in the real
worth of an asset (for variety of reasons) with the passage of time is not ordinarily recorded in
the account books. For example, if a piece of land has been purchased for Rs.80,000, then its
market price (whether Rs. 1,70,000 or Rs. 50,000) at the time of preparation of final statements
will not be considered. Thus the balance sheet on a particular date, prepared on the basis of
cost concept, does not ordinarily indicate what the assets could sold for.
As an explanation of the point (ii) of the cost concept, it can be said that the cost concept
does not mean that assets are always shown year after year for an indefinite period at the cost
price. The assets recorded at cost price at the time of purchase are systemtically reduced by
the process called depreciation. These assets ultimately disappear from the balance sheet
when their economic life is over and they have been fully depreciated and sold as scrap.
Therefore, in the books assets figure at cost less depreciation written off and are called book

values to distinguish from their market values which represent their true worth. However,
in the case of liquid assets like cash and book debts there is no difference between the book
values and current market values. But in the case of other current assets like stocks and
investments there may be some difference between the two values but the margin will not be
as wide as it will be in the case of fixed assets.
In spite of the limitations of cost concept referred to above, accountants prefer this approach
to other for the following reasons :
1. There is too much of subjectivity in ‘current worth’ or ‘market value’ or ‘realisable
value’ approach.
2. Fixed assets are purchased for use in production and are not held for sale.
3. It is very difficult and time consuming for an enterprise to ascertain the market
values.
4. There is objectivity and verifiability in cost approach which is lacking in the other
approaches.