Historical Cost Concept in Accounting

Historical Cost Concept

The basic objective of the preparation of monetary statements is to enable comparability of monetary data and consistency in the adoption of financial policies. In order to realize the above objectives, the transactions shall be recorded on historical cost. In the case in the subsequent period, there is a rise within the value of the assets then an equivalent shall not be recorded within the books of accounts.

Examples of Historical Cost Concept

In May 2013, 1000 units of inventory were purchased by Mr. X for Rs 10 per unit, in June 2013 the worth of Inventory rose to Rs 12 per unit. According to the historical cost concept, the inventory shall appear at Rs 10,000, not at Rs 12,000.

XYZ Ltd. developed ERP software at a cost of Rs 25,00,000, while the benefit that can be derived out of an equivalent is Rs 75,00,000. In such a situation, we will recognize Rs 25,00,000 within the record because of the cost of ERP and not Rs 75,00,000.


YOU MAY READ

Accounting Principles

According to The American Institute of Certified Public Accountants “Principles of Accounting are the overall law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice”

Basic Accounting Terms

After going through this lesson, you will be ready to understand the ‘Basic Accounting Terms’ that we commonly use in Accountancy.

3 Fundamental Accounting Assumptions

After browsing this lesson, you shall be ready to understand the subsequent Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual