Accounting Principles - What is Cost Concept | Accounting Concepts | LetsTute Accountancy

Summary

This video explains the cost concept in accounting, emphasizing that transactions are recorded at the actual cost paid, not market value. It provides examples involving a business owner, Peter, who records insurance, furniture, and a mobile phone at the prices he actually paid, regardless of their market value. This highlights the principle that accounting entries should reflect the amount a business pays or is liable to pay, rather than fluctuating market prices. The video offers a simple introduction to accounting fundamentals and encourages viewers to explore further courses on Udemy.

Takeaways

• 😀 The cost concept in accounting states that transactions are recorded at the cost price, not the market price.
• 😀 Peter purchased an insurance policy for $2,000, but the market price was $3,500. He records the cost he paid, $2,000.
• 😀 The actual market value of an insurance policy does not impact the amount recorded in the books. Only the actual purchase price matters.
• 😀 When Peter received furniture from his father-in-law for $500 (market price $1,000), he records the price paid, which is $500.
• 😀 Peter's mobile phone, bought for $200, is recorded at that price despite the market price dropping to $120 shortly after.
• 😀 The key takeaway is that assets are recorded based on their acquisition cost, not their fluctuating market value.
• 😀 The principle of recording transactions at cost is fundamental in accounting and applies to all types of purchases.
• 😀 Peter strictly uses the mobile phone for business purposes, but its recorded value is still based on the actual purchase price, $200.
• 😀 The video encourages viewers to explore more about accounting fundamentals in a full course available on Udemy.
• 😀 The session highlights the importance of understanding basic accounting principles, such as the cost concept, for business owners and accountants.
• 😀 The video concludes by inviting viewers to like, comment, share, and subscribe for more updates on accounting lessons.

Q & A

What is the primary principle discussed in the video?

The primary principle discussed is the cost principle in accounting, which states that transactions should be recorded at their actual cost, not at their market value.

What was the price Peter paid for the insurance policy?

Peter paid $2,000 for the insurance policy, even though its market value was $3,500.

According to the cost principle, how should Peter record the insurance policy in his books?

Peter should record the insurance policy at the amount he actually paid, which is $2,000, not the market value of $3,500.

How much did Peter pay for the furniture from his father-in-law?

Peter paid $500 for the furniture, although the actual market price was $1,000.

How should Peter record the furniture in his books?

Peter should record the furniture at the amount he paid, which is $500, and not the market price of $1,000.

What is the significance of Peter's mobile phone purchase for his business?

Peter purchased the mobile phone for $200 to use it strictly for business purposes, specifically to take grocery orders over the phone.

What happened to the price of the mobile phone after Peter bought it?

After Peter purchased the mobile phone, the price dropped to $120, but this does not affect how he records the asset.

How should Peter record the mobile phone in his books?

Peter should record the mobile phone at the price he paid, which is $200, despite the price drop to $120.

Why is it important for businesses to follow the cost principle in accounting?

It is important because the cost principle ensures that businesses record transactions based on actual costs, providing accuracy and consistency in financial reporting, regardless of market fluctuations.

Can Peter record the market value of the insurance policy or furniture instead of the price he paid?

No, according to the cost principle, Peter can only record the price he actually paid for the insurance policy or furniture, not the market value.