Page 211 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes It must be remembered that as the real worth of the assets changes from time to time, it does not
mean that the value of such an asset is wrongly recorded in the books. The book value of the
assets as recorded does not reflect their real value. It does not signify that the values noted therein
are the values for which they can be sold. Though the assets are recorded in the books at cost, in
course of time, they become reduced in value on account of depreciation charges. In certain cases,
only the assets like ‘goodwill’ when paid for will appear in the books at cost and when nothing is
paid for, it will not appear even though this asset exists on name and fame created by a concern.
Therefore, the values attached to the assets in the balance sheet and the net income as shown
in the Profit and Loss account cannot be said to reflect the correct measurement of the financial
position of an undertaking, as they do not have any relation to the market value of the assets or
their replacement values. This idea that the transactions should be recorded at cost rather than
at a subjective or arbitrary value is known as Cost Concept. With the passage of time, the market
value of fixed assets like land and buildings vary greatly from their cost.

These changes or variations in the value are generally ignored by the accountants and they
continue to value them in the balance sheet at historical cost. The principle of valuing the fixed
assets at their cost and not at market value is the underlying principle in cost concept. According
to them, the current values alone will fairly represent the cost to the entity.
The cost principle is based on the principle of objectivity. The supporters of this method argue
so long as the users of the financial statements have confidence in the statements, there is no
necessity to change this method.

Conservatism

This concept emphasizes that profit should never be overstated or anticipated. Traditionally,
accounting follows the rule “anticipate no profit and provide for all possible losses.

Example: The closing stock is valued at cost price or market price, whichever is lower.
The effect of the above is that in case market price has come down then provide for the ‘anticipated
loss’ but if the market price has gone up then ignore the ‘anticipated profits’.
Critics point out that conservation to an excess degree will result in the creation of secret reserve.
This will be quite contrary to the doctrine of disclosure. However, conservatism to a reasonable
degree may not come in for criticism.

Self Assessment

Fill in the blanks:
9. Though the assets are recorded in the books at cost, in course of time, they become reduced
in value on account of ........................ charges.
10. Conservation to an excess degree will result in the creation of .........................
11. Responsibility accounting provides a way to ........................ lower level managers and
workers.

10.4 Advantages and Disadvantages of Responsibility Accounting

Responsibility accounting has been an accepted part of traditional accounting control systems
for many years because it provides an organization with a number of advantages. Perhaps the
most compelling argument for the responsibility accounting approach is that it provides a way
to manage an organization that would otherwise be unmanageable.

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