Page 159 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes amount of cash paid. If something besides cash is exchanged (such as a car traded for a truck), cost
is measured as the cash equivalent of what is given up or received. We know that the real worth
of asset may change over a period of time so the value in the accounting records may not reflect
the real value of the assets owned by the concern. Land purchased in 1975 for ` 5 lacs and a car
purchased for ` 5 lacs in 1999 would both be recorded at these respective values in the books of
accounts. Irrespective of the fact that the land could be worth ` 5 crores today and the car would
be worth ` 3 lacs now. Accountants are fully aware of this fact but do not attempt to reflect such
changes in the accounts, as there could be significant differences in values estimated by different
entities.
The cost concept does not mean that all assets will remain in the accounting records at their
original purchase price. The cost of the asset that has a long, but limited, life is systematically
reduced over that life by the process of depreciation. The purpose of the depreciation process is
to systematically remove the cost of the asset from the account and show it as the cost of
operations. Still, depreciation has no necessary relationship to changes in market value or to the
real worth of the asset.

To emphasise the distinction between the accounting concept and value, as we understand it, the
term book value is used for the historical cost amounts as shown in the accounting records and
the term market value for the actual value of the asset in the market.
The cost concept provides an excellent illustration of the objectives of the accounting principles;
relevance, objectivity and feasibility. These three criteria can often conflict with each other. For
example, if a company develops a new product, it can have a significant effect on the real value
of the company. This information of the new product is very relevant to the creditors and the
investors as also the internal users but the value of this product would normally be estimated by
the management and is highly subjective. Therefore, accounting does not attempt to record such
values thereby sacrificing relevance in the interest of objectivity. Therefore, the cost concept
fulfils the criteria of objectivity and feasibility but does not fulfil the criteria of relevance. It is
not purely objective also but is relatively more objective than estimating market values and
reporting them.

13.2.5 The Dual Aspect Concept

The value of the assets owned by the concern is equal to the claims on these assets. The
fundamental accounting equation is the formal expression of the dual aspect concept. All
accounting procedures that we will discuss later are derived from this equation. The equation is
written as:
Assets = Liabilities + Owner’s Equity

Economic events, which are recorded in the accounting system, are called transactions.

Did u know? What is double entry system of accounting?
Every transaction that an organisation undertakes has a dual impact on the accounting
records, i.e., it will have an impact on two (or more) accounts simultaneously. This is why
accounting is also called a double-entry system.

Example: Suppose that Ms. Sharda starts a dry-cleaning business and her first act is to
buy an industrial washing machine for ` 1 lac with her own money. The dual aspect of this
transaction would be that a proprietorship business now has an asset, an industrial washing
machine, of ` 1 lac and Ms. Sharda, the owner, has a claim of ` 1 lac against this asset. Putting this
in the above equation, we get

154 LOVELY PROFESSIONAL UNIVERSITY