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Difficulty: EasyAccounting Concepts and Conventions

A business enterprise purchased office equipment for ₦500,000₦500,000 five years ago. Although the current market value of the equipment has appreciated to ₦800,000₦800,000, the accountant continues to record the asset at its original purchase cost in the financial statements. Which accounting concept or convention justifies this treatment?

  1. Historical cost conceptAnswer
  2. B
    Business entity concept
  3. C
    Bookkeeping recording scope
  4. D
    Money measurement concept

Answer

Historical cost concept
The historical cost concept requires that all assets be recorded in the accounting records at their purchase price (cost of acquisition). This valuation remains the basis for accounting in subsequent periods, ignoring market value fluctuations, to ensure objectivity and reliability.

Step-by-Step Solution

1
Analyze the scenario given in the stem
The business retains the asset's original acquisition price of ₦500,000₦500,000 in its financial statements instead of adjusting to the higher market value of ₦800,000₦800,000.
Understanding how the accounting entry handles market value appreciation versus purchase price.
2
Identify the governing accounting rule
The principle stating that assets are recorded at their historical acquisition price is the Historical Cost Concept.
This concept ensures objectivity and verifiability based on original transaction documents.

Key Concept

Historical Cost Concept
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Topics

Accounting Concepts and Conventions

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