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Unit 1: Basic Accounting Review

1.4.7 Cost Concept Notes

It is the concept closely relevant with the going concern concept. Under this concept, the
transactions are recorded only in terms of cost rather than in market value. Fixed assets are only
entered in terms of the purchase price which is an original cost of the asset at the moment of
purchase. The depreciation is deducted from the original value which is the initial purchase
price of the asset will highlight the book value of the asset at the end of the accounting period.
The marketing value of the asset should not be taken into consideration, why? The main reason
is that the market value of the asset is subject to fluctuations due to demand and supply forces.
The entry of market value of the asset will require the frequent update of information to the tune
of changes in the market. Will it be possible to record the changes taken place in the market then
and there? This is not only impossible for regular updating of information but also leads to lot
of consequences. Though the firm is ready to register the market value, which market value has
to be taken into consideration? The market value can be bifurcated into two categories, viz.

1. Realizable value, and
2. Replacement value
Realizable value is the value of the asset at the moment of sale or realization.
Replacement value is another value which considered at the moment of replacing the old asset
with the new one.
These two cannot be the same at single point of time and the wear and tear of the asset will play
pivotal role in fixing the realization value which has the demarcation over the later.
1.5 Accounting Conventions

Accounting conventions are bearing the practical considerations in recording the transactions of
the business enterprise in systematic manner.

1. Convention of consistency
2. Convention of conservatism
3. Convention of disclosure
4. Convention of materiality

Let us understand each of them one by one.
1. Convention of Consistency: The nature of recording the transactions should not be changed
at any cause or moment. It should be maintained throughout the life period of the firm. If
a firm follows the straight line method of charging the depreciation since its inception
should be followed without any change. The firm should not alter the method of charging
the depreciation from one method to another. The change cannot be entertained. If any
change has to be incorporated, the valid reason for change should be emphasized.

2. Convention of Conservatism: The conservatism won’t give any emphasis on the anticipation
of the firm, instead it gives paramount importance to all possible uneventualities of the
firm without considering the future profits.
The most important of the rule of guidance at the moment of valuing the stock is as
follows:

Stock of the goods should be valued either market price or cost whichever is lower
to anticipate the future losses due to default in the payments of the customers

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