VALUATION PRINCIPLES OF ACCOUNTING

VALUATION  PRINCIPLES 

There are four measurement base or valuation principles

1.        Historical Cost

2.        Current Cost

3.        Realizable Value

4.        Present Value

Historical Cost :- It means acquisition price or purchase price. For example, Rs.7,00,000/- paid to purchase the machine,  here historical cost of machine is Rs.7,00,000/-.Under this principle, assets are valued at an amount paid or fair market value at the time of acquisition.

   Accordingly Liabilities are recorded at the amount of the proceeds received in exchange for the obligation.

liability is recorded at the amount of proceeds received in exchange for an obligation.

Current Cost :- Assets are recorded at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset has been acquired currently.

Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to be settle the obligation currently

Realizable(settlement) value :-  Under this principle, Assets are recorded or valued at amount which can be obtained if assets are sold in open market.

 Liabilities are carried at their settlement values; i.e. the discounted amounts of cash or cash equivalents expressed to be paid to satisfy the liabilities in the normal course of business.

Present Value :- Under this principle, Assets are recorded at present discounted value of future net cash inflows that is expected to generate in the normal course of business.

-Liabilities are recorded at present discounted value of future net cash outflows which are expected to be paid to settle liabilities in normal course of business.

Measurement and valuation  :- Value relates to benefit to be derived from objects, abilities or idea. According to economist, value is the utility (i.e. satisfaction) of economic resources to the person using it. According to accountant, value of objects, abilities or ideas is always measured in term of money.

Accounting Estimates:- Transaction is measured at the amount which is paid for or by applying valuation principle. But there are some assets and liabilities which are not occurred or can not be measured by applying valuation principle like depreciation, provision for doubtful debts. But these assets or liabilities are necessary to record in books of accounts but for recording these items we need some value and for withdrawing such value we make reasonable estimates based on existing situation and past experience.

Thus management makes various estimates and assumption of assets, liabilities, income and expenses as on the date of preparation of financial statement like depreciation, amortization of expenses, provisions of employee benefits etc.

Process of estimation involves judgments based on information available.

-Estimate requires revision if changes occur regarding circumstances on which the estimate was based.

Change in estimates means difference arises between certain parameters estimated earlier and re-estimated during the current period or actual results achieved during current period.

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