Explain historical cost principle and consistency assumption of accounting.

Asked by Topperlearning User | 4th Jul, 2016, 10:59: AM

Expert Answer:

According to historical cost principle, all assets are recorded in the books of accounts at the purchase price which includes the purchase price, cost of acquisition and installation. The purchase price will remain same for all further accounting even though there is a change in the market value. For example, a machine is purchased for Rs. 2,50,000 its acquisition cost is Rs. 10,000 transportation cost is Rs. 5,000 and the installation cost is Rs. 12,000. Hence, the cost of machine will be entered in the books of accounts as Rs. 2,77,000. If the market value of machine is increased to Rs. 3,00,000 this change in the cost will not be reflected in the books of accounts. It does not maintain the true value of machine.

According to consistency assumption of accounting, accounting policies and practices followed by an enterprise should be uniform and consistent over a period of time. For example, if an enterprise follows different methods in two years for depreciation of its assets, then the financial information will not be comparable. Hence, the personal bias gets eliminated through the practice of consistency. However, consistency does allow changes in accounting policies but it should be disclosed. 

Answered by  | 4th Jul, 2016, 12:59: PM