Historical cost is used for recording value of purchases of an asset because ______ applies.

Question

Accepted Answer

The correct option is 3:
The **Cost Concept**, also universally known as the Historical Cost Principle, is the foundational accounting principle that mandates recording an asset at its original acquisition price, including all necessary costs to bring it to its intended use (such as installation and transportation). This is the correct answer because the historical cost provides an objective and verifiable basis for initial recording, as the actual price paid is supported by legal documentation like invoices and receipts. This characteristic of objectivity ensures reliability and protects the financial statements from manipulation. The asset is then systematically reduced by depreciation, but its core valuation remains tied to this original historical cost on the balance sheet throughout its life, providing a consistent measure for accountability and financial stability.

The incorrect option is 1:
The **Matching Concept** is a time-period assumption related to the income statement, not the initial balance sheet valuation. It dictates that expenses incurred in earning revenue should be recognized in the same accounting period as the revenue they helped generate. The concept's primary focus is the timing of expense recognition (like matching depreciation expense to the revenue of the period), not the method used to initially value a non-current asset upon purchase.

The incorrect option is 2:
The **Convention of Disclosure** is an overriding principle that requires financial statements to fully and fairly present all material and relevant information for users. This principle is concerned with transparency, ensuring all significant facts, policies, and contingent liabilities are explained in the notes to accounts. It informs *how* the asset's cost or depreciation method is presented, but it does not determine the initial *value*—the historical cost—at which the asset must be recorded in the first place.

The incorrect option is 4:
The **Realisation Concept**, or Revenue Recognition Principle, is focused on the timing of revenue. It dictates that revenue should be recognised when it is considered 'earned' (typically when goods or services are transferred) and its receipt is reasonably certain. This concept governs sales transactions and profit calculation, which is a different area of accounting entirely, and thus has no direct relationship with the initial recording value of a purchased asset.