Cost
Concept
According to this Cost concept, all transactions
and events are recorded in the book" of account at the actual
price involved. This price is called cost. All assets are
carried in the books of accounts from year to year at their
acquisition cost (also called historical cost) irrespective
of any change in their market value. Acquisition cost is considered
highly objective, reliable, definite and free from bias. Thus
when a machine is purchased for Rs. 5 lakhs, transportation
expenses are Rs. 20,000, installation expenses are Rs. 10,000,
the machine is valued at Rs. 5,30,000. This is the historical
cost of machine. However, the cost concept creates difficulties
in its application in the following situations:
(a) When due to price rise, the prices of all commodities
go up substantially, the financial position of a firm depicted
on cost concept basis does not reflect true picture.
(b) Financial statements of two or more firms set up
at different points of time prepared on historical cost basis
are not comparable due to changes in prices.
(c) Depreciation is computed on historical cost. This
understates depreciation when current value of an asset is
very high. So it becomes necessary to revalue the assets.
(d) This concept implies recording of all assets for
which costs have been incurred but the assets like managerial
competence, reputation or goodwill of the firm acquired over
a period of time are not recorded.
(e) The exception to this concept of valuing assets
at cost irrespective of its market value is the valuation
of inventories. According to AS-2, inventories should be valued
at cost or market price whichever is lower.
In spite of the limitations, cost concept
is still considered highly objective and free from bias.
Dual
Aspect Concept
Every transaction entered into by a firm
has two aspects, viz., debit and credit. Debit represents
creation of or addition to an asset or an expense or the reduction
or elimination of a liability. Credit means reduction or elimination
of an asset or an expense or the creation of or addition of
a liability. Therefore, according to dual aspect concept,
at any time, the total assets of a business are equal to its
total liabilities. In the equation form:
Assets = Capital + Liabilities
Assets denote the resources owned by a business
while the term liability refers to external claim. And capital
is the claim of the owners against the assets of the business.
The system of accounting, which records both the aspects of
a transaction ever, is based on Double Entry System of bookkeeping.
Full
Disclosure Concept
Accounting records are meant for the use
of owners, investors, lenders, creditors, bankers, employees
and Government for various purposes. They must be prepared
honestly and all material information should be disclosed
for the benefit of its users. An attempt should be made to
make the information revealed more meaningful to all those
who are entitled to receive it. In case of a holding company,
accounts of subsidiary companies should be attached with those
of the holding company. Sufficient annexures should follow
the income statement and the balance sheet to make the full
disclosure. The Companies Act 1956 has taken sufficient precautions
in this regard. This is in keeping with the latest trend of
financial statements as a means of conveying and not concealing
information.
The Accounting Standard-l (AS-I) issued by
the Institute of Chartered Accountants of India mentions about
'Disclosure of Accounting Policies' in paragraph 24-27 as
follows:
24. All significant accounting policies
adopted in the preparation and presentation of financial statements
should be disclosed.
25. The disclosure of the significant accounting policies
as such should form part of the financial statements and the
significant accounting policies should normally be disclosed
at one place.
26. Any change in the accounting policies which has
a material effect in the current period which is reasonably
expected to have a material effect in later period should
be disclosed. In the case of a change in accounting policies
which has a material effect in the current period, the amount
by which any item in the financial statements is affected
by each change should also be disclosed to the extent ascertainable.
Where such account is not ascertainable, wholly or in part,
the fact should be indicated.
27. If the fundamental accounting assumptions, viz., going concern, consistency and accrual, are followed in
financial statements, specific disclosure is not required.
If a fundamental accounting assumption is not followed, the
fact should be disclosed. |
Accounts
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