Question

The Cost Principle, is an important measurement principle which is used in accounting. Describe the cost principle and discuss what happens if an asset like land has an increase in the fair value. How would the company report the land?

Answer 1

COST PRINCIPLE REQUIRES THAT WHEN AN ASSET IS ACQUIRED, INITIALLY IT IS TO BE RECORDED/RECOGNISED AT THE CASH OR EQUIVALENT VALUE THAT WAS PAID FOR ACQUIRING THE ASSET. HENCE, IT IS MEASUREMENT OF ASSET AT THE COST OF ACQUISITION AS OPPOSE TO ITS CURRENT MARKET VALUE/ FAIR VALUE. IF THE CURRENT MARKET VALUE IS LESS THAN THE COST OF ASSET THAN WITH THE 'CONSERVATISM PRINCIPLE' IT MAY BE RECORDED AT THE LOWER MARKET VALUE.

COST PRINCIPLE DOES NOT REQUIRE SUBSEQUENT REVALUATION OF THE VALUE OF ASSET AS PER THE FAIR MARKET VALUE AND REQUIRES TO CONTINUE RECOGNITION OF THE ASSET AT THE COST OF ASSET LESS DEPRECIATION OVER THE USEFUL LIFE OF THE ASSET.

HENCE, IN CASE OF INCREASE IN VALUE OF AN ASSET LIKE LAND ( WHICH IS NOT DEPRECIATED ), IT SHALL STILL BE SHOWN AT ITS COST AT THE TIME OF ACQUISITION.

HENCE, COMPANY SHALL REPORT THE LAND.

NOTE: AS QUESTION ONLY REQUIRES DESCRIPTION OF COST PRINCIPLE AND DISCUSSION OF SPECIFIC CASE STUDY. ONLY THOSE THINGS HAVE BEEN INCLUDED IN THE ANSWER. WITH THE CHANGE IN ACCOUNTING PRINCIPLES AND SHIFT IN APPROACH, COST PRINCIPLE HAS BEEN UNDER QUESTION AND FAIR VALUE HAS BEEN USED WIDELY FOR SUBSEQUENT VALUATION.