Accounting Cost Concept: Significance, Dual Aspect Ratio, Realization Concept

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Accounting cost concept states that all assets are recorded inbooks of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. Fixed assets like building, plant and machinery, furniture, etc. are recorded in books of accounts at a price paid for them, according to this concept. Cost concept is also known as historical cost concept. Effect of this concept is that if the business entity does not pay anything for acquiring an asset this item would not appear in books of accounts.

Significance of Accounting Cost Concept

  • It helps in calculating depreciation on fixed assets.

  • Concept requires asset to be shown at the price it has been acquired, which can be verified from the supporting documents.

Dual Aspect Ratio

Dual aspect is the basic principle of accounting. It provides very basis of recording business transactions in books of accounts. This concept assumes that every transaction has a dual effect. For example, goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. These two aspects are recorded.The duality concept is commonly expressed in terms of fundamental accounting equation:

This accounting equation states that the assets of a business are always equal to claims of owner/owners and outsiders. The knowledge of dual aspect helps in identifying two aspects of a transaction which helps in applying rules of recording transactions in books of accounts.

Significance of Dual Aspect Concept

  • Concept helps accountant in detecting error.

  • It encourages accountant to post each entry in opposite sides of two affected accounts.

Realization Concept

Revenue from any business transaction should be included in accounting records only when it is realized, according to realization concept. The term

Realization means creation of legal right to receive money.

Significance of Realization Concept

  • It helps in making the accounting information more objective.

  • It provides that the transactions should be recorded only when goods are delivered to buyer.

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