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Explain Historical cost principle and consistency Assumption of accounting. 


Solution

Historical Cost Principle: According to this principle all fixed assets are recorded in the books at cost i.e. the price paid to acquire them. Any subsequent increase or decrease in their value will not be shown in the records except the depreciation of these assets. Therefore in subsequent years, fixed assets are shown at cost, less depreciation provided on them up to date. Continuous charging of depreciation on the asset will ultimately eliminate the asset from the books.

Consistency Assumption: This assumption requires that accounting practices, methods, and techniques used by a business unit should be consistent. It does not mean that the business cannot change the method of accounting. If some improved and better method of accounting is made available it can be adopted by the business. But it should not be done again and again.

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