The cost principle is a part of Accounting Principles, which are general ways used in identification and calculation in accounting events. There are necessities to stabilize accounting in countries (S. Nyquist 2000, p. 181). Cost principle was pioneered in 1991 by the Global Environment Facility (GEF) (G. Labbate 2008).
There are a few different types of Accounting Principles (S. Nyquist 2000, p. 181):
- the cost principle,
- realization principle,
- matching principle,
- objectivity principle,
- materiality principle,
- full disclosure principle,
- consistency principle,
- conservatism principle.
What is cost principle
Cost principle, which is often called exchanged-price principle, request an accountant to register transfers of resources at prices that were agreed by the sides taking part in exchange in the moment of the transaction (R. Hermason, J. Edwards, M. Maher 2010, p. 260).
Three aspects that are set by cost principles are (R. Hermason, J. Edwards, M. Maher 2010, p. 260):
- transaction data - what should go into the accounting system,
- time of exchange - when a transaction takes place,
- exchange prices - amounts at which assets, liabilities, stockholders' equity, expenses and revenues were recorded.
R. Hermason, J. Edwards, M. Maher (R. Hermason, J. Edwards, M. Maher 2010, p. 260) state that accountants prefers the term exchange-price principle than cost principle. That's because they feel like using the term “cost” is inappropriate to name things like liabilities, stockholders' equity, and such assets as cash and accounts receivable.
Historical Cost Principle
Based on the fact that cost principle dictates purchased or self-constructed assets to be initially documented as a historical cost, it is often referred to as the historical cost principle. Historical cost can be described as the paid amount, or the fair market value of the liability incurred or different resources surrendered, to obtain an asset and establish it in a condition and position for its intended use (R. Hermason, J. Edwards, M. Maher 2010, p. 260).
In recent years Financial Accounting Standards Board (FASB) are usually replacing the historical cost principle with fair value principle, which means documenting the value of an asset or liability at its current market (fair) value rather than its book (historical) value (D. V. Kousenidis, A. C. Ladas, C. I. Negakis 2010, p. 146; R. Hermason, J. Edwards, M. Maher 2010, p. 260).
- Ellul Andrew and others (2015), Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading, The Journal of The American Finance Association, vol. 70, no. 6
- Hermason R., Edwards J., Maher M. (2010), Accounting Principles: A Business Perspective, Financial Accounting. Chapters 1 - 8, Open College Textbook
- Kousenidis D. V., Ladas A. C., Negakis C. I. (2010), Value Relevance of Accounting Information in the Pre- and Post-IFRS Accounting Periods, European Research Studies, vol. 13, no. 1
- Labbate G. (2008). The incremental cost principle and the conservation of globally important habitats: A critical examination, Ecological Economics, vol. 65, no. 2
- Nissim D. Penman S. (2008) Principles for thr Applicattion of Fair Value Accounting, Columbia Business School, White Paper Number Two
- Nyquist S. (2000). Accounting theory and financial environmental reports, Corporate Social Responsibility and Environmental Management, vol. 7, no. 4
Author: Olga Marmuszewska