What does the Cost Principle state in accounting?

The Cost Principle in accounting states that assets should be recorded at their purchase price, which represents the actual cost incurred to acquire the asset. This principle emphasizes the concept of objectivity and verifiability in financial reporting, as the purchase price is a reliable and measurable amount.

When an asset is acquired, its value is recorded on the balance sheet at the historical cost, and this amount remains unchanged on the financial statements, regardless of fluctuations in market value over time. This approach provides clarity and consistency in financial reporting, as companies are not required to adjust the value of assets based on subjective measures or changes in market conditions.

By adhering to the Cost Principle, financial statements can be prepared based on factual information rather than estimates or market assessments, making them more reliable for decision-making by stakeholders. This fundamental accounting principle also means that any additional costs related to getting the asset ready for use, such as installation or transportation, are typically included in the recorded value, further solidifying this method of valuation.