Skip to content

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

Mehta & Sons bought office furniture for Rs 50,000 and paid Rs 5,000 for freight and installation. The firm records the furniture at Rs 55,000. Which accounting principle best supports including the Rs 5,000?

The cost principle supports it. An asset is recorded at its purchase price plus freight, installation and other costs needed to bring it to working condition. So the furniture is shown at Rs 55,000 and the Rs 5,000 is capitalised, not charged as an expense.

  1. ACost principle: an asset is recorded at all costs needed to bring it into useCorrect
  2. BConservatism: all costs are to be treated as expenses immediately
  3. CPeriodicity: only purchase price is recorded in the period
  4. DMoney measurement: only the invoice price is measurable

Explanation

Under the historical cost principle, an asset's cost includes the purchase price plus expenditure necessary to bring it to its location and working condition. Freight and installation therefore are capitalised, giving Rs 55,000. Expensing them would ignore that they give long-term benefit.

Did you get it right without looking?

One question tells you little. A timed set on Accounting Principles, Concepts and Conventions shows your real accuracy, how long you take and where you lose marks.

Practise Accounting Principles, Concepts and ConventionsFree diagnostic mock

More Accounting Principles, Concepts and Conventions questions