The cost principle

Acquisition cost or historical cost is the

appropriate valuation basis for recognition of
the acquisition of all goods and services,
expenses costs, and equities.
“cost is the amount, measured in money, of
cash expended or other property transferred,
capital stock issued, services performed, or a
liability incurred in consideration of goods or
services received or to be received.”
 The cost principle
Cost = exchange price of or the monetary
value given for the acquisition of goods or
services.
Justified with objectivity and going-concern
postulate
disadvantage of unit-of measure postulate,
that assumes purchasing power of the dollar
is stable.
See page 110
 The matching principle
(EXPENSE RECOGNITION)
Expense recognition is traditionally tied to
revenue recognition.
• referred to as the matching principle
• dictates that expenses should be matched
with revenues in the period in which
efforts are made to generate revenues.
1) Cost of goods
merchandise inventory becomes expensed when
the inventory is sold
2) Operating expenses
 Operating expenses contribute to the revenues
of the period but their association with
revenues is less direct than for cost of goods
sold.

Provides No
Provides Future Cost Apparent Future
Benefit Incurred Benefits

Benefits Decrease
Asset Expense
 The matching principle
The association between revenues and
expenses depends on one of these criteria:
1. direct matching with a revenue.
2. direct matching with the period.
3. allocation of costs over periods benefited.
4. expensing all other costs in the period
incurred, unless they have future benefit
The matching principle
 The objectivity principle
1- This principle holds that accounting must be
carried out on an objective and factual basis.

Accounting data should be verifiable and bias

free.

Objectivity in valuation of fixed assets and

recording transactions.
 The objectivity principle
2- This principle holds that the usefulness of financial
information depends on the reliability of the
measurement procedure used.
There are different interpretations of this objectivity:
an objective measurement is an impersonal
measure
an objective measurement is a very viable
measurement
an objective measurement is the result of
consensus among a given group of observers
The full-disclosure principle

Disclosure of accounting data

should be “full”, “fair”, and
“adequate”

See page 113

 The full disclosure principle
Should contains sufficient information for
average investor making decision.

Details of accounting policies and methods.

Additional information to aid in investment
analysis or various claims party
Changes from preceding years in accounting
policies or methods
Assets, liabilities, costs & rev. with party that
have controlling interest.
Contingent assets, liabilities and commitments.
 The full disclosure principle

Techniques of Disclosure:

Parenthetical Explanations
Notes
Cross-Reference and Contra Items
Supporting Schedules