Cost Concept

This is closely related to the going concern concept. According to this concept, an asset, defined as a resource owned by a business, is ordinarily shown in financial accounts at cost, that is, the price paid to acquire it. Under this concept, a piece of land purchased for say, Rs. 2 lakhs, in the year  1956-57, will continue to be shown ordinarily at the same value in all subsequent years (except if re-valuation is undertaken). Assets are shown with their value at purchase cost and not current market value or current worth. 

Firstly, this provides an objective basis for the financial statements without any personal bias which may be involved in estimating current value. Secondly, those responsible to prepare the financial statements are absolved of the need to keep track of changes in the current market value of the asset, including even obsolescence. 

Thirdly, as a disadvantage, this concept prevents the accounting statements from reflecting the current position if there has been a change in prices. In these contexts, the term book value is the (residual) cost (after providing for depreciation) as shown in the financial accounts whereas the term market value is to refer to the actual or realisable (resale) value of the asset under currently prevailing market conditions. Those reviewing the accounting statements should be aware to this feature.