However, an exception to this rule is the diminution in value that may arise from the depreciation of assets.įor example, suppose that a piece of land is acquired by a business at a specific price and, accordingly, is recorded as an asset in the books at that cost.

Notably, since assets are recorded at the cost of acquisition, any future increase or decrease in their values is not recorded in the balance sheet. However, if the goodwill of another organization is purchased at a price, then following the cost principle, it will appear as an asset in the company's balance sheet. To elaborate on this concept, if an asset does not cost anything (i.e., no money is paid for its acquisition), it would not be recorded in the company's books.įor this reason, assets such as an organization's technological skills, managerial capabilities, brands, and goodwill are not recorded as assets. The cost concept of accounting can be characterized best by saying that for accounting purposes, all transactions are recorded at their monetary cost of acquisition (i.e., the price paid for acquiring an asset or receiving services). Characteristics of the Cost Concept of Accounting The cost of an item may be different compared to its true value, but since figuring out the true value would be subjective, stating the assets at historical cost is generally accepted as a fair way to maintain records.įollowing the cost concept of accounting means that unless there are special reasons for doing otherwise, the assumption should be made that the cost of an item is its true value, and all accounting entries should be made at cost. However, there are also some limitations to the cost concept of accounting.įor example, in the context of inflation, the cost concept of accounting would lead to an overstatement of net profit.ĭespite its limitations, the cost concept of accounting is regarded as the best option when compared to the available alternatives. Under this concept, stability in asset prices while recording is achieved. Under the cost concept of accounting, an asset should be recorded at the cost at which it was purchased, regardless of its market value.įor example, if a building is purchased for $500,000, it will continue to appear in the books at that figure, irrespective of its market value. Therefore, if a balance sheet shows an asset at a certain value, it should be assumed that this is its cost unless it is categorically stated otherwise. This has three aspects: risk governance (risk assessment, management and communication), science-policy interfaces and the link between precaution and innovation.The cost concept of accounting states that all acquisitions of items (e.g., assets or items needed for expending) should be recorded and retained in books at cost. The precautionary principle is closely linked to governance. The application of the precautionary principle presents many opportunities as well as challenges. Although most experts agree that the precautionary principle does not call for specific measures (such as a ban or reversal of the burden of proof), opinions are divided on the method for determining when to apply precautionary measures. Different stakeholders, experts and jurisdictions apply different definitions of the principle, mainly depending on the degree of scientific uncertainty required for the authorities to take action.

To others, it is an approach that protects human health and the environment. To some, it is unscientific and an obstacle to progress. The precautionary principle divides opinions. It first emerged during the 1970s and has since been enshrined in a number of international treaties on the environment, in the Treaty on the Functioning of the European Union and the national legislation of certain Member States. The precautionary principle enables decision-makers to adopt precautionary measures when scientific evidence about an environmental or human health hazard is uncertain and the stakes are high.

Define cost principle