Page 27 - Book-keeping for Secondary Schools Student’s Book Form One

Basic principles of Book-keeping

the financial statements and the potential avoids general estimates of an asset’s value
influence it may have on the decisions of and prevents manipulation of reported
users. figures based on market fluctuations.

By considering materiality principle, However, critics argue that the historical
financial statements can provide a balance cost principle may not provide a relevant
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between the need for comprehensive and and accurate representation of an asset’s true
accurate reporting and the practicality value, particularly for long-lived assets like
of focusing on information that is most property, plant, and equipment. Over time,
relevant and significant to the users of the the market value of assets may change due
financial statements. to factors such as inflation, technological
advancements, or changes in market
Historical cost principle conditions. Some alternative valuation
Historical cost accounting is an accounting methods, such as fair value accounting,

principle that states that, assets should be attempt to address these limitations by
recorded and reported at their original cost valuing assets at their current market value.
when acquired by an enterprise. According Despite its limitations, the historical cost
to this principle, the initial cost of an asset principle remains widely used in financial
reporting, especially for assets that do not
represents its value, regardless of any have determined market values. It provides
changes in market value over time. In this a conservative approach to valuing assets
principle, when an enterprise acquires an and is considered a fundamental principle in

asset, it is recorded on the financial position traditional accounting practices. Historical
statement (balance sheet) at the price cost principle is in line with the going
paid to acquire or produce the asset. This concern principle.
cost includes the purchase price and any
additional costs incurred to bring the asset Consistency principle
to its present condition and location, such This principle states that once an accounting
as transportation costs and installation fees.
method or principle has been chosen and
applied, it should be consistently used for
The rationale behind the historical cost

principle is to provide a reliable and objective similar transactions and events in subsequent
basis for financial reporting. By using the periods. In other words, an entity should not
original cost of an asset, financial statements change its accounting methods or principles
reflect the actual resources expended by arbitrarily from one period to another, as it
the enterprise at the time of acquisition. can create confusion and make it difficult
This principle promotes consistency and to compare financial information across
comparability in financial statements. It different periods.

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