A study on the Historical cost concept Essay

1 ) David L. Scott claims that the sum of money that was originally used to pay for an plus. A company records assets on a balance sheet at historical cost, which frequently bears small relation to the market value of the assets after they have been owned several old ages. Besides called original cost.

2 ) In the Generally Accepted Accounting Principles, the original cost of an plus on a balance sheet. Many assets, peculiarly illiquid assets, are recorded on a balance sheet harmonizing to their historical cost. A noteworthy exclusion to this regulation is the recording of marketable securities, which are recorded harmonizing to their market value. The historical cost normally bears small or no relationship to the market value after an plus has been held for several old ages. ( Farlex Financial Dictionary. A© 2009 Farlex, Inc. All Rights Reserved, online )

3 ) I.Horngren, Charles T. ( 1926 ) claims that the cost rule steps are based upon dealing costs. Goods and services acquired from providers are recorded at their existent purchase cost ( historical cost ) . Gross saless are recorded at the monetary value of goods and services sold to clients.

Money Measurement Concept

1 ) Frank Wood, ( 1967 ) claims that the money measuring construct can be measured in pecuniary units and most people will hold to the pecuniary value of the dealing

2 ) Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, ( 1973 ) claims that the money measuring construct underlines the fact that in accounting, every recorded event or dealing is measured in footings of money. Using this rule, a fact or a go oning which can non be expressed in footings of money is non recorded in the accounting books.

One of the basic rules in accounting is “ The Measuring Unit rule: The unit of step in accounting shall be the basal money unit of the most relevant currency.This rule besides assumes the unit of step is stable ; that is, alterations in its general buying power are non considered sufficiently of import to necessitate accommodations to the basic fiscal statements

3 ) Stephen C.Schaefer, claims that Money Measurement construct holds that the buying power of the dollar is comparatively stable. Therefore, comptrollers may add and deduct dollar sums as though each dollar had the same buying power. Note the effects of rising prices is ignored in accounting.

The Business Entity Concept

1 ) Stephen C.Schaefer, claims that the entity construct states that the records of a concern entity should be separate from the personal records of the proprietor.

2 ) D. Victor stated that the concern entity construct holds that a concern is a separate entity from its proprietor or proprietors, whatever the legal place of the endeavor may be. A concern could take several signifiers, i.e. partnership, exclusive bargainer or corporation. These types of concern have a certain legal position. For illustration, sole bargainers do non hold a separate legal position, whereas a corporation has a separate legal position from the proprietor. That makes the corporation a separate legal entity

3 ) I.Horngren, Charles T. ( 1926 ) claims that the concern entity construct is one of the most basic construct used in the readying of fiscal statements is that of the accounting entity. It is defined as the entity for which accounting informations is collected. An accounting entity is an organisation, or a subdivision of an organisation that stands apart from other organisations and persons as a separate economic unit for the intent of some determination.

The Time Interval Concept

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

2 ) Paul Kimmel, Shirley Carlon, Janice Loftus, Rosina Mladenovic, Donald E.Kieso, Jerry J.Weygandt, ( 2003 ) claims that the clip interval provinces that the life of a concern can be divided into unreal periods and that utile studies covering those periods can be prepared for business.All entities study at least yearly.

3 ) Wolk, Harry I. ; James L. Dodd and Michael G. Tearney ( 2004 ) claims that this construct defines a specific interval of clip for which an entity ‘s studies are prepared.A This can be a financial twelvemonth ( Mar 1 – Feb 28 ) , natural twelvemonth ( Jan 1 – Dec 31 ) , or any other meaningful period such as a one-fourth or a month.

Traveling Concern Assumption

1 ) I.Horngren, Charles T. ( 1926 ) claims that Traveling Concern is the utility of an information that includes the coverage of assets and the computation of net incomes on the footing of cost involves doing educated conjectures about events that may go on a figure of old ages therefore. Under the traveling concern rule comptrollers assume that the concern will go on runing for the foreseeable hereafter.

2 ) Stephen C.Schaefer claims that the construct holds that the entity will stay in operation for the foreseeable hereafter. Therefore, the relevant step of the entity ‘s assets is historical cost. If the entity were traveling out of concern the relevant step 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 traveling concern rule provinces that the concern will stay in operation for the foreseeable hereafter. Of class many concern do neglect, but in general, it is sensible to presume that the concern will go on operating, Management must do an appraisal of the cogency of that traveling concern premise when fixing fiscal statements in conformity with accounting criterions.

Question 2

In accounting the historical cost construct provinces that every purchased point or assets are recorded at its original value or monetary value at that specific clip. Therefore, if a company should sell its assets in the close hereafter, it will be sold at the current monetary value and non its historical monetary value. For illustration, a house buys a piece of land for $ 400,000 in the twelvemonth 1992. In the twelvemonth 2002, the market monetary value for the land is now $ 1,000,000 but the house still keeps the basal monetary value of the land at $ 400,000 because it was bought at that monetary value at that specific clip.

Another accounting construct would be the money measuring construct. The pecuniary rule is defined as a record of an event or dealing that is taking topographic point which is measured in footings of money. For illustration, in Malaysia minutess are stated in RM ( Ringgit Malaysia ) and foreign money like USD, SGD, Sterling lbs and Yen will be converted to RM in order for fiscal statements to be done.

The concern entity construct is the basic construct of accounting which differentiates the concern and its proprietor. In other words, personal minutess will non impact the concern. An illustration, when the proprietor buys a auto for personal usage, the money used to buy the auto will non be deducted from the company ‘s history.

The clip interval construct is known to be a fiscal period. Thus, fiscal statements or studies are done within the period of one twelvemonth. Fiscal statements can besides be prepared in a clip frame of 6months, 3 months and so on. For illustration, an investor wants to cognize the advancement of a company, therefore studies will be made yearly for the investor.

Last, the traveling concern premise is known to be a utile information which consist of computations of assets and net incomes. Accountants normally use the traveling concern rule to presume that the concern will go on runing for old ages to come. For illustration, investors would merely put in a concern after construing the fiscal statements prepared while presuming that the company will go on runing for the foreseeable hereafter.