IGC-L31 — Historic Cost & Money Measurement
Understanding how assets are recorded and why only measurable financial information is included in accounting records.
Learning Objectives
- define the historic cost principle
- define the money measurement principle
- explain the importance of both principles
- apply these principles in accounting situations
- answer examination-style theory questions
Concept Framework
Historic Cost Principle
The historic cost principle states that:
Explanation
Once an asset is recorded, its value remains based on the original cost, regardless of changes in market value.
Example
A building purchased for £100,000 will continue to be recorded at £100,000 in the accounts (subject to depreciation if applicable), even if its market value increases.
Importance
Historic cost ensures:
• reliability of financial data
• objective measurement
• consistency in records
Money Measurement Principle
The money measurement principle states that:
Explanation
Non-financial factors are not recorded in accounting records.
Example
• Employee skills and experience are important but not recorded
• Good reputation is not recorded unless it has a measurable value
Importance
Money measurement ensures:
• records are clear and objective
• financial statements are consistent
• only quantifiable data is included
Comparison of Principles
Historic Cost Money Measurement
Records original cost Records only monetary items
Focus on asset valuation Focus on measurable data
Ensures reliability Ensures objectivity
Impact on Financial Statements
Historic Cost
Ensures:
• assets are recorded at cost
• values are reliable and verifiable
• consistency in asset valuation
Money Measurement
Ensures:
• only financial data is recorded
• non-measurable items are excluded
• financial statements remain clear
Worked Examples
A machine is purchased for £20,000.
Even if its market value becomes £25,000, it is still recorded at:
A business has highly skilled employees.
This is not recorded because it cannot be measured in monetary terms.
📌 Additional theory-based questions are available in the
🎯 Question Papers + YouTube Explanation section.
Students should practise explanation questions regularly.
Structured Practice
Level 1 – Concept Check
Define historic cost principle.
Define money measurement principle.
Level 2 – Application Practice
Explain why historic cost is used in accounting.
Level 3 – Examination Style Question
Explain the importance of the money measurement principle.
(4 marks)
📌 Additional structured adjustment questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise journal corrections and Suspense Account preparation regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Students who believe they understand this topic should attempt:
- Explain why historic cost improves reliability.
- Explain why non-financial information is excluded from accounts.
- State one limitation of the money measurement principle.
If unsure, review the lesson
Detailed Activity Solutions
Solution
Historic cost is used because it provides reliable and objective information based on actual transactions.
This ensures consistency in financial reporting.
How This Topic Appears in the Examination
This topic commonly appears through:
• definition questions
• explanation questions (2–4 marks)
• application to scenarios
Examiners frequently assess:
• correct definitions
• clear explanation
• application of principles
Students should practise regularly and review video explanations.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Self-Assessment Checklist
- I understand historic cost
- I understand money measurement
- I can apply both principles
- I can answer theory questions clearly
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