Definition: Cost principle
This accounting principle states that a company is obliged to record its fixed assets at their actual purchase price or production cost. Due to changes in the value of fixed assets over time, this principle cannot evaluate the real net worth of fixed assets belonging to a company.
Regarding the valuation of fixed assets Article 35 of the Fourth Council Directive states the following:
(a) Fixed assets must be valued at purchase price or production cost, without prejudice to (b) and (c) below.
(b) The purchase price or production cost of fixed assets with limited useful economic lives must be reduced by value adjustments calculated to write off the value of such assets systematically over their useful economic lives.
(c) (aa) Value adjustments may be made in respect of financial fixed assets, so that they are valued at the lower figure to be attributed to them at the balance sheet date;
(bb) Value adjustments must be made in respect of fixed assets, whether their useful economic lives are limited or not, so that they are valued at the lower figure to be attributed to them at the balance sheet date if it is expected that the reduction in their value will be permanent;
(cc) The value adjustments referred to in (aa) and (bb) must be charged to the profit and loss account and disclosed separately in the notes on the accounts if they have not been shown separately in the profit and loss account;
(dd) Valuation at the lower of the values provided for in (aa) and (bb) may not be continued if the reasons for which the value adjustments were made have ceased to apply.
(d) If fixed assets are the subject of exceptional value adjustments for taxation purposes alone, the amount of the adjustments and the reasons for making them shall be indicated in the notes on the accounts.
European Union, Fourth Council Directive 78/660/EEC of 25 July 1978, Article 35, based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies (Official Journal of the European Communities No L 222, 14/08/1978, p. 11)