Cost Concept in Accounting: Recording Assets at Historical Cost

What Is the Cost Concept in Accounting?

The cost concept records an asset at the amount paid or incurred to acquire or construct it. For property, plant and equipment (PPE), this includes the costs required to bring the asset to the location and condition needed for its intended use.

Paragraph 15 of Indian Accounting Standard (Ind AS) 16 requires an item of PPE that meets the recognition rules to be measured at cost when it is first recorded. Accounting Standard (AS) 10 applies the same basic approach to entities following Accounting Standards.

Cost is broader than the cash paid to the supplier. It can include the cash-equivalent price or the fair value of other consideration given, subject to the relevant accounting rules.

How Is an Asset’s Historical Cost Determined?

An asset’s historical cost has three parts:

1. The purchase price after trade discounts and rebates, including import duties and non-refundable purchase taxes.
2. Costs directly related to bringing the asset to the location and condition needed for its intended use.
3. The initial estimated cost of dismantling or removing the asset and restoring the site when such an obligation exists.

These elements are covered in paragraphs 16 to 17 of Ind AS 16 and paragraphs 17 to 18 of AS 10.

Costs Normally Included or Excluded

Stop adding costs to the asset once it is in the location and condition needed to operate as intended. Costs incurred after that point are not added merely because the asset has not yet been used, is operating below full capacity or has not reached full production.

Worked Examples of the Cost Concept

Example 1: Machinery With Recoverable GST

A trading business buys a packing machine. Assume GST at 18% only for this example. The actual rate depends on the machine's classification and the law in force on the transaction date.

Assume the supplier charges GST only on the machine and that freight and installation are paid separately without additional tax. The entry would be:

GST is excluded from the machine’s cost because this example assumes that the full input tax credit is available. 

Under section 16(3) of the Central Goods and Services Tax Act, 2017, a registered person cannot claim input tax credit on the tax component of capital goods or plant and machinery if depreciation under the Income-tax Act has been claimed on that component.

Example 2: Depreciation Under the Cost Model

Assume the machine has a historical cost of ₹10,50,000, an estimated end-of-life value, called residual value, of 5%, and a useful life of 10 years. The depreciable amount is historical cost minus residual value. Assume straight-line depreciation and no impairment or revaluation.

Under Schedule II to the Companies Act, 2013, companies ordinarily use the useful lives specified in Part C, and residual value must not exceed 5% of original cost. A different useful life or residual value is allowed only when the company discloses and justifies the difference with technical advice.

If the machine could be sold for ₹9,00,000 after three years, that market price alone would not change the carrying amount under the cost model.

Example 3: Passenger Vehicle With Blocked GST

Assume a company buys a passenger vehicle for internal staff transport. The invoice shows a taxable value of ₹10,00,000 and total GST and applicable cess of ₹3,00,000. The tax amount is illustrative and should not be treated as a standard rate for every passenger vehicle.

Under section 17(5)(a) of the Central Goods and Services Tax Act, 2017, input tax credit is generally blocked for a passenger vehicle with an approved seating capacity of not more than 13 persons, including the driver. Exceptions apply when the vehicle is used for further supply, transportation of passengers or driving training.

If no exception applies, the tax cannot be recovered and the vehicle is recorded at ₹13,00,000. The business should confirm the vehicle’s classification, seating capacity, invoice and actual use before deciding the tax treatment.

What Happens After an Asset Is Recorded?

Cost Model and Revaluation Model

Ind AS 16 and AS 10 require a business to choose either the cost model or the revaluation model for each group of similar fixed assets, such as machinery or vehicles.

The cost model keeps the carrying amount at historical cost minus accumulated depreciation and impairment. It is simpler and supported by invoices and other records, but the carrying amount can move far from current market value over time.

The revaluation model updates the carrying amount to fair value. It provides a more current valuation, but it requires repeat valuations, involves additional cost and judgement, and must cover the entire asset group. A business must revalue often enough to prevent the carrying amount from differing materially from fair value.

Impairment

An asset can lose value because of damage, obsolescence, poor performance or changes in market conditions. If its carrying amount exceeds the amount the business expects to recover from its use or sale, the difference is recognised as an impairment loss. Businesses following Indian Accounting Standards apply Ind AS 36 , while those following Accounting Standards apply AS 28.

Repairs, Replacements and Major Inspections

Routine repairs are expensed because they maintain the asset rather than create a new economic benefit. A replacement component or major inspection is capitalised only if it meets the recognition criteria. When that happens, the remaining carrying amount of the replaced component or previous inspection is removed from the books.

Land and Buildings

Land and buildings are recorded separately even when they are purchased together. A building is depreciated because it has a limited useful life. Land is not depreciated unless it has a limited useful life, as can occur with some quarries and landfill sites. A land improvement with a limited useful life is accounted for separately and depreciated over that period.

Special Rules for Inventory and Intangible Assets

The cost concept is important, but each asset category must follow its own measurement standard.

Inventory

Inventory follows a different rule. Under Ind AS 2, Inventories , stock is recorded at its cost or the amount the business expects to receive from selling it after related completion and selling costs, whichever is lower. 

Businesses following AS 2 use the same approach. Inventory is measured at the lower of cost and net realisable value. A decline in net realisable value can therefore reduce its carrying amount below cost.

Internally Generated Intangible Assets

Under Ind AS 38, Intangible Assets, a business cannot record brands, publication titles or customer lists that it creates internally as assets. AS 26 follows a similar rule.

However, not every internally developed item must be treated as an expense. Certain development costs, including eligible software-development costs, can be recorded as assets if they meet the required conditions.

Manage Fixed Assets With BUSY

Before recording an asset, collect the supplier invoice, payment proof, freight and installation bills, GST credit working, and evidence of when the asset became ready for use. Reconcile these documents with the fixed-asset ledger before calculating depreciation.

Accurate asset accounting depends on keeping purchase costs, GST treatment and depreciation records consistent. BUSY accounting software helps businesses manage these records within one accounting system, reducing the need to maintain separate spreadsheets. You can try BUSY free for 15 days .

Conclusion

The cost concept gives a business a reliable starting value for each asset. Getting this value right means separating recoverable tax, including only eligible costs and stopping additions when the asset is ready for use. This makes later depreciation and impairment more accurate. Clear supporting records also make reviews, audits and asset disposal easier.