Historic Cost Principle in Accounting

Steps:

• Identify the practice: Trader records assets and expenses at purchase price, not current market value.
• Recall accounting principles: Match the description to core concepts like entity separation, cost basis, caution, or revenue recognition.
• Eliminate mismatches: Rule out principles unrelated to valuation, such as entity or realization.
• Confirm match: Historic cost requires initial recording at actual cost paid.

Why B is correct:

• Historic cost principle mandates recording assets and expenses at their original acquisition cost, ensuring objective and verifiable financial statements.

Why the others are wrong:

• A: Business entity separates owner and business transactions, not about pricing.
• C: Prudence emphasizes caution in estimates, like understating assets, but doesn't specify purchase price recording.
• D: Realisation focuses on recognizing revenue only when earned, unrelated to asset valuation.

Final answer: B