What does the cost principle in accounting specify?

The cost principle in accounting specifies that assets should be recorded at their purchase price or cost. This principle emphasizes the importance of objectivity in financial reporting by ensuring that the value of assets reflects what was originally paid for them. This recorded cost remains unchanged over time, providing a consistent and reliable measure for accounting purposes.

By adhering to the cost principle, businesses avoid subjective estimates or fluctuations in market value, which can lead to inconsistencies and inaccuracies in financial reporting. This principle enhances the reliability of financial statements, as stakeholders can trust that asset values reflect actual historical costs rather than potentially volatile market values.

In contrast, options suggesting adjustments for fair market value, estimated selling prices, or inflation would introduce subjective elements into the accounting process, undermining the stability and reliability that the cost principle seeks to uphold.