| The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use. | |
| The concept of cost is historical in nature as it is something, which has been paid on the date of acquisition and does not change year after year |
| Adoption of historical cost brings in objectivity in recording as the cost of acquisition is easily verifiable from the purchase documents |
| The effect of cost concept is that if the business entity does not pay anything for an asset, this item will not be shown in the books of accounts. |
| Limitation– an important limitation of the historical cost basis is that it does not show the true worth of the business and may lead to hidden profits |
| During the period of rising prices, the market value or the cost at (which the assets can be replaced are higher than the value at which these are shown in the book of accounts) leading to hidden profits |