Cost Concept

It is the concept closely relevant with the going concern concept. Under this concept,
the transactions are recorded only in terms of cost rather than in market value. Fixed
assets are only entered in terms of the purchase price which is a original cost of the
asset at the moment of purchase. The depreciation is deducted from the original value
which is the initial purchase price of the asset will highlight the book value of the asset at
the end of the accounting period. The marketing value of the asset should not be taken
into consideration, Why? The main reason is that the market value of the asset is subject
to fluctuations due to demand and supply forces. The entry of market value of the asset
will require the frequent update of information to the tune of changes in the market. Will
it be possible to record the changes taken place in the market then and there? This is not
only not possible for regular updating of information but also leads to lot of consequences.
Though the firm is ready to register the market value; which market value has to be
taken into consideration? The market value can be bifurcated into two categories viz
Realizable value and Replacement value. Realizable value is the value of the asset at the moment of sale or realization. Replacement value is the another value which considered at the moment of replacing the old asset with the new one. These two cannot be the same at single point of time and the wear and tear of the asset will play pivotal role in fixing the realization value which has the demarcation over the later.

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