Bed linens showroom is an asset of a bed linens business. In placing value on the assets of a business, what figure should the accountant use? The market value? The cost of replacing them? Their original cost? Valuing assets is obviously a bristly problem.
Consider for example, the luxury bed ensemble you are using. If you were to value them at their market value, how would you determine that value? Any two persons would probably disagree as to the market value.
However, if we were to use your original cost of the bed ensemble as the basis for valuing them, any two persons would probably agree as to the price you paid, given the necessary information.
Market value provides a subjective basis for valuing objects, whereas original cost is an objective basis. If market value were used as the basis for valuing your luxury bed ensemble, a person to whom the valuation is given would not know how much he could trust the valuation.
Moreover, you are not likely to sell your bed ensemble, anyway. Therefore, you do not need to know their current market value. Instead, you are going to use them in the course of your normal activities. Because you are not about to resell your luxury bed ensemble, for most purposes its market value is irrelevant.
Similarly, a business purchases its assets with the assumption that they will be used in the company's operations; ie, the normal assumption is that the business is a going concern.
Thus, there are two reasons for valuing the assets of a business at cost rather than market value: First, market value is too subjective a measure and the second, the business does not need to know the market value because it intends to use the assets in the normal course of business rather than to resell them.
The accounting principle according to which we normally assume that a business will continue for an indefinite period and is not about to be sold is called the going concern concept.
The going-concern concept and the difficulty in determining market value objectively require us to value assets at their cost. The fact that normally assets are valued at their cost is another major accounting principle, the cost concept. Evidently, the going concern concept is one reason for the cost concept.
Assets should be recorded at cost which is the amount exchanged at the time the item was acquired. Machinery with a list price of $ 5,000 which was purchased at a discount of $ 1,000 should be recorded at $ 4,000. A bed linen showroom costing $ 70,000 at the time it was purchased on installment basis payable in 4 yearly installments of $ 20,000 or a total installment price of $ 80,000 should be recorded at $ 70,000 which is the amount or value exchanged at the time the asset was acquired.