The Cost Principle

The cost principle is one of the basic principles of accounting that states that all the assets, liabilities, equities and expenses must be recorded on the financial statements at their original costs or at their cost of acquisition. This principle is widely used in accounting for recording and calculating purposes as the cost of acquisition is the best parameter to find out the original value of an asset or a liability.

However there are certain problems associated with the cost principle method of accounting and that is historic cost of an asset at the time of acquisition of the asset may vary dramatically as compare to the present day cost of that asset. For example if the company wants to sell its assets the current sale price may vary greatly as compared to the original acquisition price of the asset. This means that cost principle may come with irrelevant and out of the date results that may affect the overall accounting calculation of the firm. Due to this problem the cost principle is not used in recording the financial investments where the accountants adjust the price of the investment according to the fair price of the investment in the market and then record the adjusted price in balance sheet.

The cost principle is basically used for the short term assets and short term liabilities where there is no great difference in the acquisition cost and the current cost of the assets and liabilities. Cost principle is not advised for the long term assets as liabilities as the cost of long term assets drastically varies over the period of time due to different factors such as depreciation, amortization and impairment.


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