Going concern, period and cost

Going concern concept: we assume the business will carry on for a long time. It is not going to close or be sold soon. Think of a road whose end you cannot see.

This is why a machine is not written off as soon as it is bought. A computer costing ₹50,000 that will be used for 5 years helps earn money in all 5 years, so ₹10,000 of its cost is charged each year (this is depreciation). Rent, on the other hand, is used up in the month it is paid, so it is an expense at once.

Accounting period concept: if the business goes on and on, you cannot wait until it ends to find the profit. So its life is cut into equal pieces, usually one year, and statements are made at the end of each. The year can be a calendar year (1 January to 31 December) or, more often in India, a financial year (1 April to 31 March). The Companies Act 2013 and the Income Tax Act both require yearly statements. Listed companies also publish results every three months (quarterly).

Cost concept: an asset is recorded at what it cost to buy and get ready for use: the price, plus transport, installation and anything else spent to make it work. A machine priced at ₹80,000 that costs ₹10,000 to bring home and ₹10,000 to install is recorded at ₹1,00,000. A building bought for ₹50,00,000, with ₹10,000 for registration, ₹15,000 for repairs and ₹25,000 for fittings, is recorded at ₹50,50,000.

This historical cost stays the same year after year. It is not changed to the market value, which rises and falls and which different people would guess differently. The cost is proved by the purchase bill, so it is objective: anyone can check it.

The weakness: when prices are rising, an old cost does not show what the asset is really worth today, and profits may look different from reality.