ACCOUNTING PRINCIPLES AND CONVENTION

(COST PRINCIPLE)

SUBMITTED BY
RISHABH BHARTI
DIV-B

PRN.NO-18010224093
CLASS-BBA-LLB

OF

SYMBIOSIS LAW SCHOOL, NOIDA

SYMBIOSIS INTERNATIONAL (DEEMED

UNIVERSITY), PUNE

IN
AUGUST, 2018

UNDER THE GUIDANCE OF

DR. MEENAKSHI KAUL

ASSISTANT PROFESSOR
SYMBIOSIS LAW SCHOOL, NOIDA
 Acknowledgement

I would like to express my special thanks of gratitude to my teacher

Dr. Meenakshi Kaul
who gave me the golden opportunity to do this wonderful project
on the topic
Accounting principles and conventions (Cost principle) I would
also express appreciation towards my parents and wonderful
classmates who also helped me in doing a lot of research which
increased my knowledge about this vast topic and made it possible
for me to
finalising this project within the limited time frame.
 Background
Most financial statements primarily use the historical cost. Under
the historical cost concept, business transactions are recorded in the
accounting books at the transaction price--that is, their actual cost at the time
the transaction took place. Consequently, income, expenses, assets, liabilities
and equity items are reported in the financial statements at their original cost.
The historical cost concept is grounded on the going concern assumption of
accounting. This assumption presupposes that the business will continue in the
future unless it can be clearly inferred from circumstances that the business is
a quitting concern. For example, imagine a certain company has suffered
losses for several years already, its cash flows have been consistently negative,
and it is very apparent that the company will shut down in a few years. This
company will have to abandon the historical cost concept and may now report
items in the financial statements at their current cost, rather than at the
historical cost. This is because the users of financial information are no longer
concerned with objective and verifiable information. At the moment, they are
more concerned with how much they could possibly get in the event of
liquidation.
Introduction
Cost accounting is the classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, and for
the presentation of suitably arranged data for purposes of control and guidance
of management. It includes the ascertainment of the cost of every order, job,
contract, process, service or unit as may be appropriate. It deals with the cost
of production, selling and distribution.
FEATURES:
1. It is a process of accounting for costs.
2. It records income and expenditure relating to production of goods and
services.
3. It provides statistical data on the basis of which future estimates are
prepared and quotations are submitted.
4. It is concerned with cost ascertainment, cost control and cost reduction.
OBJECTIVES:
1. To ascertain the cost per unit of the different products manufactured by a
business concern;
2. To provide a correct analysis of cost both by process or operations and by
different elements of cost;
3. To disclose sources of wastage whether of material, time or expense or in
the use of machinery, equipment and tools and to prepare such reports which
may be necessary to control such wastage;
4. To provide requisite data and serve as a guide for fixing prices of products
manufactured or services rendered;
5. To ascertain the profitability of each of the products and advise management
as to how these profits can be maximised;
 Hypothesis

The researchers have a brief knowledge about all the accounting principles and
conventions and with the help of research, Cost Principle holds a superior
place while ranking other principles.

Conceptual Framework

The cost principle requires one to initially record an asset, liability, or equity

investment at its original acquisition cost. The principle is widely used to
record transactions, partially because it is easiest to use the original purchase
price as objective and verifiable evidence of value.
The cost principle also means that valuable brand names and logos that were
developed through effective advertising will not be reported as assets on the
balance sheet. This could result in a company's most valuable assets not being
included in the company's asset amounts. (On the other hand, a brand name
that is acquired through a transaction with another company will be reported
on the balance sheet at its cost.)
If a company has an asset that has a ready market with quoted prices, the
historical cost may be replaced with the current market value on each balance
sheet. An example is an investment consisting of shares of common stock that
are actively traded on a major stock exchange.

General Issues

The disadvantages of the system are given below:

 Historical cost accounting concept is fixed, which means it is recorded
based on the original cost in the invoice or receipt. 
 Historical cost accounting concept does not show the true value of
company’s assets.
 Historical cost accounting concept is lead to the insufficient provision
of depreciation.
 Under historical cost accounting concept, financial reporting, such as
Income statement does not show the true profit of the company as the
revenues of the company are recorded on current price while the
expenses are recorded at historical cost.

Literature Review
As fair market value of assets can change significantly over time, the historical
cost always remains the same and is the value recorded on the financial
statements. One exception to this rule is an asset such a marketable security
that is publically traded. The historical cost may be replaced with current
market value on the Balance Sheet. However, since marketable securities
fluctuate significantly over time, it may be a better option to leave the carrying
value at historical cost. (Sran, Dave 2015)
In the absence of a Standard or an Interpretation that specifically applies to a
transaction, management must use its judgement in developing and applying
an accounting policy that results in information that is relevant and reliable. In
making that judgement, IAS 8.11 requires management to consider the
definitions, recognition criteria, and measurement concepts for assets,
liabilities, income, and expenses in the Framework. This elevation of the
importance of the Framework was added in the 2003 revisions to IAS 8."
(IASB’s Framework, 1989)

REFERENCES

https://www.scribd.com/document/334561795/research-paper-
accounting
https://www.researchgate.net/publication/228975766_Cost-
Estimating_Principles
https://en.wikipedia.org/wiki/Historical_cost
https://www.jstor.org/stable/240053?
Search=yes&resultItemClick=true&searchText=cost&searchText=
principle&searchUri=%2Faction%2FdoBasicSearch%3FQuery
%3Dcost%2Bprinciple&refreqid=search
%3Acdf72f874e90c00473dbcdf32eb695d7&seq=1#page_scan_tab
_contents