Concept of costing
Concept of costing
All transactions are entered in the books at the price paid is called cost. This avoids an arbitrary value being placed on the asset and all subsequent accounting is in relation to the cost. Therefore, the recording of the assets is at cost figures and this may not reflect the current market value especially in the case of the older assets. The value of an asset in the accounting records does not remain at the original cost A cost which is expired is an expenditure of money, the economic value of which has been made use of during a particular year or lost without accruing any benefit to the entity, like machinery destroyed by flood. Depreciation, looked at from this view-point, is nothing but gradual recovery of cost incurred, that is, money paid at a time during a particular year for acquiring a fixed asset, during the subsequent years (during which the asset is assumed to remain serviceable on some estimated basis, by treating the expired cost pertaining to a particular year, calculated on some approved and selected estimated basis, by including such expired cost, called an expense, in the cost of production of that particular accounting year.
In accounting, depreciation is nothing less and nothing more than a process of allocation of some specific costs (cost of acquiring fixed assets) on some generally accepted may or may not be legally approved estimated basis. An expired cost is not a money measure of the wear and tears obsolescence (passage of time) etc. of any fixed assets. It is just a reasonable basis for recovery of cost of fixed asset in a gradual manner. Money value of wear and tear would need engineering analysis, which is not the domain of financial accounting. Therefore, in financial accounting homework this cost concept theory takes major role. Cost is the exchange price of goods and services at the time they are acquired. So, cost is also the economic sacrifice cab be expressed in monetary terms required to obtain a specific asset or a group of assets. Very often cost is not represented by a single exchange price, but it includes many sacrifices of economic resources necessary to obtain the asset in the form, location and time in which it can be useful to the operating activities of the firm. Thus, all of these sacrifices should be included in the concept of cost valuation. Hence, from the point of view of utility, it becomes very difficult to value each of those assets individually. It is because of the teamwork of a group of mutually useful assets, for example, when a team playing well, it is very difficult to assess the contribution even of a so-called mediocre player, to the team performance.