The cost principle does have two major disadvantages. However, if a business uses the cost principle for a number of its assets, it may take an accountant less time to verify the cost of the business’s assets, thus saving the business money. If it takes an accountant a long time to prepare a business’s financial statements, it will cost a business more money. If a company hires an accountant or a financial advisor, they might find that they are charged additional fees for certain services. Since the value is the original price of the asset when it is purchased, it can easily be verified through an invoice, bank transfer, or sales receipt. When a business uses the historical cost principle to record the value of an asset, the value will be objective and easy to verify. Therefore, companies might not be required to update their records over time to keep track of the asset’s current market value. This makes it a lot easier to maintain a record of the asset’s initial value.īusinesses can easily do this since the historical cost principle only requires an asset’s initial cost to be recorded. When using the cost principle, a business only records the asset’s initial cost. It also can save the company money when it uses financial services to help determine the value of its assets while using the historical cost principle. The cost principle makes it easy for a business to objectively record the cost of an asset and to track an asset’s cost. This means that even if an asset appreciates or depreciates in value over time, the cost principle will still be the initial cost of the asset when it was acquired.īecause the cost principle is so easy to use, there are some advantages businesses may find when using this principle. The cost principle is also known as the historical cost principle. Short and long-term assets, as well as liabilities and equity, can be recorded at historical cost, then all of these will always be recorded at their initial cost.Ī business’s financial records often keep track of the depreciation or increase in the value of its assets.īut, the cost principle of these assets will stay the same. The cost principle states that businesses should record assets at their original cost.Īfter the business records the asset value, it will not be changed to reflect any increases in market value, improvements in the asset, or to consider any depreciation. We will be discussing the cost principle, how it is used, and give some examples of its use in this article. This value will not be changed over time to reflect the changes in the asset’s market value. This value is the cost principle, and for many businesses, the cost principle will be used to record the value of the business’s tangible assets. When a company purchases an asset, it will record the value of that asset at its initial purchase price in the company’s financial reports.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |