According to cost concept, the various assets acquired by a concern or firm should be recorded on the basis of the actual amounts involved or spent.The fixed asset will be recorded at cost at the time of its purchase but it may systematically be reduced in its value by charging depreciation. Example, When a machine is acquired by paying Rs.5,00,000 following cost concept the value of the machine is taken as Rs. 5,00,000.
The Cost Concept creates a lot of distortion too as outlined below:
In an inflationary situation when prices of all commodities go up on average, acquisition cost loses its relevance.
Many assets do not have acquisition costs. Human assets of an enterprise are an example. The cost concept fails to recognise such asset although it is a very important asset of any organization.
Going Concern Concept:
The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future.
Business transactions are recorded on the assumption that the business will continue for a long-time.
Fixed assets are valued on the basis of cost less proper depreciation keeping in mind their expected useful life ignoring fluctuations in the prices of these assets.When an enterprise liquidates a branch or one segment of its operations, the ability of the enterprise to continue as a going concern is not impaired. But the enterprise will not be considered as a going concern if it goes into liquidation or it has become insolvent.
Mx.X purchased a machine for his business paying Rs. 10,00,000 out of Rs. 7,00,000 invested by him. He also paid transportation expenses and installation charges amounting to Rs.70000, If he is still willing to continue the business, his financial position will be as follows.
Money Measurement Concept
As per this concept, only those transactions, which can be measured in terms of money are recorded.
Transactions and events that cannot be expressed in terms of money are not recorded in the business books. Non-monetary events like, death, dispute, sentiments, efficiency etc. are not recorded in the books, even though these may have a great effect.
This concept ignores that money is an inelastic yardstick for measurement as it is based on the implicit assumption that purchasing power of the money is not of sufficient importance as to require adjustment. Entity and money measurement are viewed as the basic concepts on which other procedural concept hinge.
Accounting Period Concept
As per the Going Concern Concept an indefinite life of the entity is assumed. For a business entity it causes incovenience to measure performance achieved by the entity in the ordinary course of business.
The Periodicity Concept facilitates in:
1) Comparing of financial statements of different periods
2) Uniform and consistent accounting treatment for ascertaining the profit and assets of the business
3) Matching periodic revenues with expenses for getting correct results of the business operations.
Normally all transactions are settled in cash but even if cash settlement has not taken place, it is proper to record the transaction or the event concerned into the books. Expense is a cost relating to the operations of an accounting period or tot the revenue earned during the period or the benefits of which do not extend beyond that period.
Accrual means recognition of revenue and costs as they are earned or incurred and not as money is received or paid. The accrual concept relates to measurement of income, identifying assets and liabilities.
As per Accrual Concept: Revenue – Expenses = Profit
Accrual Concept provides the foundation on which the structure of present day accounting has been developed.