Cost Principle

 requires one to record an asset or liability at its original acquisition cost regardless of current
market value, replacement cost or inflation-adjusted cost.
 The cost principle states that cost is recorded at the price actually paid for an item.
 For example, when a retailer purchases inventory from a vendor, it records the purchase at the
cash price that was actually paid. The cost is equal to the amount paid in the transaction.

Importance of historical cost concept

An important advantage of historical cost concept is that the records kept on the basis of it are considered
consistent, comparable, verifiable and reliable.

Any valuation basis other than historical cost may create serious issues for companies. For example, if a
company uses current market value or sales value rather than historical cost, each member of accounting
department is likely to suggest a different value for each asset of the company.

No matter how small your business is, your assets are a big deal. You need to know how to manage and
account for them properly. The cost principle is a simple and reliable way to track assets. The historical
cost principle shows the actual amount you paid for an asset, ensuring that an objective cost was recorded.
The price principle is based on past transactions.

Examples
Terms Used:
1. Equity investment-
1. Perry’s General Merchandising bought a truck in 2001 for
2. Replacement cost-
Php1M. Today this truck is already worth Php3M. Perry
3. Fair value-
would still report the equipment at its purchase price of
4. Depreciation-
Php1M even though its current fair market value is already
Php3M.
- The cost is equal to the amount paid in the
transaction.

2. The Washington Company constructed a building at a cost of $45,000 in 2005. On December 31,
2017, the fair market value of the building is $65,000 but still stands on the balance sheet at its
original cost of $45,000. YES
3. Gabbygail buys Sybielle’s Chippy for P10.00. However, she could’ve bought the same product
from Fatima for P8.00. She declares that she only paid P8.00 for the Chippy. NO
Full Disclosure Principle
 requires that all necessary information must be disclosed in the financial statements
 information that would “make a difference” to financial statement users or would be useful in
decision-making should be disclosed in the financial statements
 so that people who are accustomed to reading financial information can make informed decisions
concerning the company. This way investors or creditors can see a total picture of the company
before they choose to take any action.
 investors can be misled into making unintelligent decisions as a result of withholding financial
information
 A company can be fined millions of dollars for any discrepancies or misconduct involved with their
financial statements or accounting information.

Importance

Companies use the full disclosure principle as a guide to understand what financial and non-financial
information should be included in their financial statements. The full disclosure principle states that
disclosed information should make a difference as well as be understandable to the financial statement
users. As you can see, these disclosures would be essential for investors, creditors, and other readers of
the financial statements to properly view a company’s overall financial position.

Example

1. Mercury Enterprises purchased a piece of property. A few

months after the purchase, someone slipped and fell on the Terms used:
property and became seriously injured. The injured party is 1. Footnotes-
currently suing Mercury Enterprises for negligence. There is
a high probability that Mercury Enterprises will lose the
lawsuit. In this case, Mercury Enterprises should disclose the
lawsuit in the footnotes.

1. Jupiter Corp. refuses share their accounting policies and methods they use for preparing their
financial statements to the users of financial information. The users of financial information were
left confused and were misled because of so. YES

- Accounting policies need to be disclosed because they help understand the basis of
accounting.
https://www.myaccountingcourse.com/accounting-principles/historical-cost-principle