Multiple choice

Mr. A purchased a machinery costing Rs. 1,00,000 on 1st October, 2005. Transportation and installation charges were incurred amounting Rs. 10,000 and Rs. 4,000 respectively. Dismantling charges of the old machine, in place of which new machine was purchased amounted to Rs. 10,000. Market value of the machine was estimated at Rs. 1,20,000 on 31st March 2006. While finalising the annual accounts, A valued the machinery at Rs. 1,20,000 in his books.

Which of the following concepts was violated by A?

  1. Cost concept

  2. Matching concept

  3. Realisation concept

  4. Periodicity concept

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A Correct answer
Explanation

The cost concept requires assets to be recorded at their historical acquisition cost, including all necessary expenses to bring the asset to working condition. Here, total cost = Rs. 1,00,000 (purchase) + Rs. 10,000 (transport) + Rs. 4,000 (installation) + Rs. 10,000 (dismantling) = Rs. 1,24,000. Valuing at market value (Rs. 1,20,000) violates the cost concept, which states that assets should not be revalued upwards unless under specific circumstances.

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