The Cost Concept in Accounting

The cost concept is one of the basic underlying guidelines in accounting and understanding which enables accountants to maintain the accuracy in the profession. Below article discusses the cost concept in brief.

In accounting, cost is defined as the cash amount or the cash equivalent which is given up for an asset. It includes all costs necessary to get an asset in place and ready for its intended use. To give an example, the cost of an item in inventory also includes the item’s freight-in cost. As regards the cost concept, it is one of the basic underlying guidelines in accounting. It is also known as the historical cost principle. The assertion made under the cost concept is that assets should be recorded at the cash amount or its equivalent at the time when they are acquired.

In accordance with this concept, it is important to note that regardless of whether the cost or acquisition price of an asset is greater or lesser than the fair market price, but the asset is to be recorded in the accounting books at the price which is actually paid. At this point, it is important to be aware of what the fair market price is. Fair market price is the price of something at which both a seller and a buyer are willing to make a deal. It may further be noted that it is the amount at which an asset would change hands between two parties where both have knowledge of the relevant facts.

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Written by:

K. A. Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Blogger, Software Developer
BBA, MBA-Finance, MPhil-Financial Management, (MSc-Software Engineering)
(PhD-Management)
MA-English, MPhil-English
Post Graduate Diploma in Computer Applications and Programming
Certificate course in English language proficiency
Level 1 – Leadership and Management ILM – UK
Pursuing CMA-USA
Individual Member of Institute of Management Consultants of India

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