Multiple choice

A trader purchased a machinery worth Rs. 1,00,000 on October 1, 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 a new machine was purchased, amounted Rs. 10,000. Market value of the machine was estimated as Rs. 1,20,000 on March 31, 2006, while finalizing the annual accounts. Trader valued the machinery at Rs. 1,20,000 in his books. Which of the following concepts was violated by the trader?

  1. Cost concept

  2. Matching concept

  3. Realisation concept

  4. Periodicity concept
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The cost concept (also called historical cost concept) requires assets to be recorded at their acquisition cost, not at current market value. The trader violated this by valuing the machinery at Rs. 1,20,000 (market value) instead of Rs. 1,14,000 (historical cost = Rs. 1,00,000 purchase + Rs. 10,000 transport + Rs. 4,000 installation). Note: dismantling charges of old machine are typically expensed, not capitalized.

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