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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

A firm values its machinery at the price paid, Rs 4,00,000, even though a dealer says the machine could now fetch Rs 5,50,000. The firm continues to show it at cost less depreciation. This follows mainly which concept?

The treatment follows the historical cost concept. Assets are recorded at the price actually paid to acquire them, less depreciation, and later market valuations such as the dealer's Rs 5,50,000 estimate are ignored because they are unrealised and subjective.

  1. AHistorical cost conceptCorrect
  2. BRealisation concept
  3. CAccrual concept
  4. DEntity concept

Explanation

Assets are recorded at the actual cost paid and are not revalued for market-price changes in ordinary books. The dealer's quotation is an unrealised opinion and is ignored. The treatment is therefore based on historical cost.

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