Accounting Period and Cost Concept of Accounting

Accounting period concept – Accounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared, to know whether it has earned profits or incurred losses during that period and what exactly is the position of its assets and liabilities at the end of that period. Such information is required by different users at regular interval for various purposes, as no firm can wait for long to know its financial results as various decisions are to be taken at regular intervals on the basis of such information. The financial statements are, therefore, prepared at regular interval, normally after a period of one year, so that timely information is made available to the users. This interval of time is called accounting period.

Cost concept – The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use. The concept of cost is historical in nature as it is something, which has been paid on the date of acquisition and does not change year after year. For example, if a building has been purchased by a firm for $50000, the purchase price will remain the same for all years to come, though its market value may change.

However, an important limitation of the historical cost basis is that it does not show the true worth of the business and may lead to hidden profits. For example, if a building has been purchased by a firm for $50000, the purchase price will remain the same for all years to come, though its market value may change. Hence it is important to keep this thing in mind while following the cost concept of accounting.

1 comment… add one
  • GEORGE SEKARAN

    very useful initiative indeed for beginners who are facing some accounting examiniations.

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