Which of the following accounting principles would require that all goods and services purchased be recorded at cost?
a. Going-concern principle.
b. Continuing-concern principle.
c. Cost principle.
d. Business entity principle.
The correct answer and explanation is :
The correct answer is c. Cost principle.
Explanation:
The Cost principle (also known as the Historical cost principle) dictates that all goods and services purchased must be recorded at their original cost rather than their current market value. This principle is foundational in accounting because it ensures that financial statements are objective, verifiable, and consistent.
Under the Cost principle, the value of an asset is recorded at the price at which it was acquired, and this value is used for future financial reporting and analysis. For instance, if a company purchases inventory for $10,000, it will be recorded at that cost, even if the market value of the inventory fluctuates over time. This rule also applies to other transactions such as property, plant, equipment, and other assets, ensuring consistency across reporting periods.
The rationale behind this principle is to provide a clear, consistent, and objective basis for financial reporting. Since market prices can fluctuate, recording assets at their original cost prevents subjective interpretation, providing a more stable and reliable measure of a company’s financial position.
Why the Other Options Are Incorrect:
- Going-concern principle: This principle assumes that a business will continue to operate indefinitely unless there is evidence to the contrary. It doesn’t specifically deal with how goods and services should be recorded. Instead, it is more concerned with the assumption that the company will not liquidate in the near future.
- Continuing-concern principle: This is a similar term to the going-concern principle, used interchangeably in some contexts, and it also assumes that a company will continue to operate in the future. Like the going-concern principle, it doesn’t directly dictate how goods or services should be recorded.
- Business entity principle: This principle states that the financial records of a business must be kept separate from those of its owners or other businesses. It doesn’t specifically deal with the recording of assets at cost.
In summary, the Cost principle requires that goods and services be recorded at their purchase cost, providing consistency and objectivity in financial reporting.