A study on the Historical cost concept


1) David L. Scott claims that the amount of money that was originally used to pay for an asset. A company records assets on a balance sheet at historical cost, which often bears little relation to the market value of the assets after they have been owned several years. Also called original cost.

2) In the Generally Accepted Accounting Principles, the original cost of an asset on a balance sheet. Many assets, particularly illiquid assets, are recorded on a balance sheet according to their historical cost. A notable exception to this rule is the recording of marketable securities, which are recorded according to their market value. The historical cost usually bears little or no relationship to the market value after an asset has been held for several years. (Farlex Financial Dictionary. © 2009 Farlex, Inc. All Rights Reserved , online )

3) I.Horngren , Charles T. (1926) claims that the cost principle measures are based upon transaction costs. Goods and services acquired from suppliers are recorded at their actual purchase cost ( historical cost ) . Sales are recorded at the price of goods and services sold to customers.

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Money Measurement Concept

1) Frank Wood , (1967) claims that the money measurement concept can be measured in monetary units and most people will agree to the monetary value of the transaction

2) Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973) claims that the money measurement concept underlines the fact that in accounting, every recorded event or transaction is measured in terms of money. Using this principle, a fact or a happening which cannot be expressed in terms of money is not recorded in the accounting books.One of the basic principles in accounting is "The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency.This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements

3) Stephen C.Schaefer , claims that Money Measurement concept holds that the purchasing power of the dollar is relatively stable. Therefore, accountants may add and subtract dollar amounts as though each dollar had the same purchasing power. Note the effects of inflation is ignored in accounting.

The Business Entity Concept

1) Stephen C.Schaefer , claims that the entity concept states that the records of a business entity should be separate from the personal records of the owner.

2) D. Victor stated that the business entity concept holds that a business is a separate entity from its owner or owners, whatever the legal position of the enterprise may be. A business could take several forms, i.e. partnership, sole trader or corporation. These types of business have a certain legal status. For example, sole traders do not have a separate legal status, whereas a corporation has a separate legal status from the owner. That makes the corporation a separate legal entity

3) I.Horngren , Charles T. (1926) claims that the business entity concept is one of the most basic concept used in the preparation of financial statements is that of the accounting entity. It is defined as the entity for which accounting data is collected. An accounting entity is an organization , or a section of an organization that stands apart from other organizations and individuals as a separate economic unit for the purpose of some decision.

The Time Interval Concept

1) Frank Wood , (1967) states that the financial statements are prepared at regular intervals of one year.

2) Paul Kimmel, Shirley Carlon, Janice Loftus, Rosina Mladenovic, Donald E.Kieso, Jerry J.Weygandt, (2003) claims that the time interval states that the life of a business can be divided into artificial periods and that useful reports covering those periods can be prepared for business.All entities report at least annually.

3) Wolk, Harry I.; James L. Dodd and Michael G. Tearney (2004) claims that this concept defines a specific interval of time for which an entity's reports are prepared.  This can be a fiscal year (Mar 1 - Feb 28), natural year (Jan 1 - Dec 31), or any other meaningful period such as a quarter or a month.

Going Concern Assumption

1) I.Horngren , Charles T. (1926) claims that Going Concern is the usefulness of an information that includes the reporting of assets and the calculation of profits on the basis of cost involves making educated guesses about events that may happen a number of years hence. Under the going concern principle accountants assume that the business will continue operating for the foreseeable future.

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2) Stephen C.Schaefer claims that the concept holds that the entity will remain in operation for the foreseeable future. Therefore, the relevant measure of the entity's assets is historical cost. If the entity were going out of business the relevant measure of its assets would be market value.

3) Paul Kimmel, Shirley Carlon, Janice Loftus, Rosina Mladenovic, Donald E.Kieso, Jerry J.Weygandt, (2003) claims the going concern principle states that the business will remain in operation for the foreseeable future. Of course many business do fail, but in general, it is reasonable to assume that the business will continue operating, Management must make an assessment of the validity of that going concern assumption when preparing financial statements in accordance with accounting standards.

Question 2

In accounting the historical cost concept states that every purchased item or assets are recorded at its original value or price at that specific time. Thus, if a company should sell its assets in the near future, it will be sold at the current price and not its historical price. For example, a firm buys a piece of land for $400,000 in the year 1992. In the year 2002 , the market price for the land is now $1,000,000 but the firm still keeps the base price of the land at $400,000 because it was bought at that price at that specific time.

Another accounting concept would be the money measurement concept. The monetary principle is defined as a record of an event or transaction that is taking place which is measured in terms of money. For example, in Malaysia transactions are stated in RM ( Ringgit Malaysia ) and foreign money like USD, SGD, Sterling pounds and Yen will be converted to RM in order for financial statements to be done.

The business entity concept is the basic concept of accounting which differentiates the business and its owner. In other words, personal transactions will not affect the business. An example, when the owner buys a car for personal use, the money used to purchase the car will not be deducted from the company's account.

The time interval concept is known to be a financial period. Thus, financial statements or reports are done within the period of one year. Financial statements can also be prepared in a time frame of 6months, 3 months and so on. For example, an investor wants to know the progress of a company , thus reports will be made annually for the investor.

Lastly, the going concern assumption is known to be a useful information which consist of calculations of assets and profits. Accountants usually use the going concern principle to assume that the business will continue operating for years to come. For example, investors would only invest in a business after interpreting the financial statements prepared while assuming that the company will continue operating for the foreseeable future.