The cost principle is more important to a company for historical purposes. This is because the price you purchased an asset at may not be the fair market value to another person. You have proof of the purchase, and no one can tell you that the value is lower than that. When using the cost principle, an asset’s value is easy to determine. The only thing required to prove an item’s worth is a document. Even if you’re an accounting newbie, you know the importance of assets.

It makes asset values objective, and it is easier to report on than other methods. Yes, when using the cost principle, depreciation of an asset still needs to be recorded. Using the cost principle will still record the original cost of the asset. A music company purchases the copyright to a movie from an independent filmmaker. The newly purchased asset should be recorded at the cost of the purchase itself.

Cost principle – What is the cost principle?

On the other hand, it does not show the true market value of assets in the financial statement. What The Cost Principle Is And Why You Need To Know It It is being followed across the world and is a standard accounting practice.

It can be used when reporting on assets that have been held in anticipation of sale. Some business equipment – like computers – are never worth more than what you paid for it. But for many capitalized assets, like real estate or heavy equipment, the opposite is often true. With values changing all the time, companies that purchased real property even five years ago could almost certainly get more for that property now. Yet cost accounting requires that they continue to value that asset at the price they paid for it, less any depreciation.

What is the basic objective of a cost concept?

The IRS outlines depreciation schedules for taxpayer use, and a trained accountant can also implement them. Any depreciation of assets creates recurring tax benefits for business, https://www.wave-accounting.net/ as depreciation can be offset against the business’s income. Cost principle concept applies to companies that use accrual accounting but wish to be GAAP compliant.