Accounting – 6.5 Limitations of accounting statements | e-Consult

Historic Cost Principle: This principle requires that assets are recorded at their original purchase price, rather than their current market value. It reflects the actual cost incurred by the business at the time the asset was acquired.

Importance in Financial Statements: The historic cost principle provides a consistent and objective basis for accounting. It allows for comparability of financial statements over time and between different companies. It avoids the subjectivity and potential volatility associated with valuing assets at current market prices. It also provides a verifiable record of transactions.

Recording the Machine: The machine should be recorded in the accounting records as a fixed asset at its historic cost of £15,000. This would typically involve debiting a Fixed Assets account and crediting a Cash or Bank account. The machine will be depreciated over its useful life, and the depreciation expense will be recorded each year. The initial entry would look like this:

• Debit: Fixed Assets £15,000
• Credit: Cash/Bank £15,000