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Cost concept in accounting – meaning and explanation.

Cost concept is one of the fundamental concept of accounting which is closely related to the going-concern concept. As per this concept:

  • an asset is ordinarily entered into the accounting records at the price paid to acquire it i.e., at its cost; and
  • This cost is the basis for all subsequent accounting for the asset.

The implication of this concept is that the purchase of an asset is recorded in the books at the price actually paid for it irrespective of its market value. For e.g. If a business buys a building for TZS. 3,00,000, the asset would be recorded in the books as TZS. 3,00,000 even if it’s the market value at that time happens to be TZS. .4,00,000. However, this concept does not mean that the asset will always be shown at cost. This cost becomes the basis for all future accounting of the asset. It means that the asset may systematically be reduced in its value by charging depreciation. The significant advantage of this concept is that it brings in objectivity in the preparations and presentation of financial statements. But like the money measurement concept, this concept also does not take into account subsequent changes in the purchasing power of money due to inflationary pressures. This is the reason for the growing importance of inflation accounting.

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