Abstract

Ravi Kumar (Ravi) started an agriculture equipment renting services business, Ravi Agriculture Services. He rented different types of farm equipment to facilitate faster processing of agriculture activities. He provided depreciation on the agriculture equipment and also followed a liberal credit and revenue recognition policy to ensure smooth flow of business operations, as well as meet the needs and requirements of the farmers. However, he faced problems in terms of replacing one piece of agricultural equipment. The cost of the equipment had increased over the years, and the increase could not be covered by the provision he had made for its replacement. This case study can be used to discuss the pros and cons of recording business transactions at historical cost, and also to discuss the principle of conservatism and how it facilitates the decision making process in business operations.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• The application of the historical cost approach and its limitations
• The pros and cons of the conservatism principle
• The effect of the historical cost approach and conservatism principle on decision making

Keywords

Accounting; Accounting principles; Accounting Concepts; Historical Cost Concept; Conservatism Principle; Decision-making; Profit and loss account; balance sheet