Explain the historical cost concept. How is depreciation and book value of asset calculated as per this concept?
Explain the historical cost concept. How is depreciation and book value of asset calculated as per this concept?
According to this principle, an asset is recorded in the books of accounts at their cost price, which includes the cost of acquisition, transportation, installation and making the asset ready for use. This cost is the basis for all subsequent accounting of such assets.
For example,machinery is purchased for Rs,10,00,000.At the end of the accounting period, it is found that the market value of machinery is Rs.15,00,000.
However, it will be recorded in the books at Rs.10,00,000 only.
Adoption of historical cost brings objectivity in recording as the cost of acquisition is easily verifiable from the purchase documents.
For calculating depreciation and book value of asset the following points should be considered
(i) Depreciation to be charged on assets is calculated on the basis of the cost of asset and market value of such asset is irrelevant for the accounting of such assets.
(ii) The book value of the asset in the books of accounts is decided on the basis of cost less depreciation, without giving consideration to its marketplace.
According to this principle, an asset is recorded in the books of accounts at their cost price, which includes the cost of acquisition, transportation, installation and making the asset ready for use. This cost is the basis for all subsequent accounting of such assets.
For example,machinery is purchased for Rs,10,00,000.At the end of the accounting period, it is found that the market value of machinery is Rs.15,00,000.
However, it will be recorded in the books at Rs.10,00,000 only.
Adoption of historical cost brings objectivity in recording as the cost of acquisition is easily verifiable from the purchase documents.
For calculating depreciation and book value of asset the following points should be considered
(i) Depreciation to be charged on assets is calculated on the basis of the cost of asset and market value of such asset is irrelevant for the accounting of such assets.
(ii) The book value of the asset in the books of accounts is decided on the basis of cost less depreciation, without giving consideration to its marketplace.
