Class 11 Accountancy Notes
Valuation Principles
Comprehensive Study Guide for Examination
Introduction to Valuation Principles
Valuation is the process of determining the monetary amounts at which the elements of the
financial statements (assets, liabilities, equity, income, and expenses) are to be recognized and
carried in the balance sheet and profit and loss account. According to accounting standards, there
are four generally accepted measurement bases or valuation principles used in accounting.
1. Historical Cost
Definition & Meaning
Historical cost is the most commonly adopted valuation principle. Under this base, assets are
recorded at the amount of cash or cash equivalents paid, or the fair value of the consideration
given, at the time of their acquisition. Liabilities are recorded at the amount of proceeds received
in exchange for the obligation.
Key Features
• Highly objective and verifiable because it is backed by documentary evidence (like invoices).
• It ignores inflation and changes in the market value of the asset over time.
• Depreciation is charged on this original historical cost.
Example: A company buys a piece of land in 2015 for ₹10,00,000. By 2026, the market value of
the land has increased to ₹50,00,000. Under the historical cost principle, the land will still be
shown in the Balance Sheet at ₹10,00,000.
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Class 11 Accountancy Notes
2. Current Cost
Definition & Meaning
Current cost (also known as replacement cost) is a valuation method where assets are carried at
the amount of cash or cash equivalents that would have to be paid if the same or an equivalent
asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to settle the obligation currently.
Key Features
• Reflects the current economic reality and takes inflation or market price fluctuations into
account.
• Highly subjective as it relies on estimates of what replacing the asset would cost today.
• Useful for internal management decisions but generally not used for external financial reporting
under standard GAAP.
Example: A business bought machinery 3 years ago for ₹5,00,000. To buy that exact same
machinery today would cost ₹6,50,000. Under the current cost principle, the asset is valued at
₹6,50,000.
3. Realisable Value (Settlement Value)
Definition & Meaning
Realisable value is the amount of cash or cash equivalents that could currently be obtained by
selling the asset in an orderly disposal (normal market conditions, not a forced liquidation).
Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash
expected to be paid to satisfy the liabilities in the normal course of business.
Key Features
• Focuses on the exit value (what the business would get if it sold the asset) rather than the
entry value (what it cost to buy).
• Often used when valuing inventory (valued at cost or net realisable value, whichever is lower)
to adhere to the conservatism concept.
Example: A company holds inventory that cost ₹50,000 to manufacture. However, due to
changing trends, it can only be sold in the market for ₹40,000 after deducting selling expenses.
Its Realisable Value is ₹40,000.
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Class 11 Accountancy Notes
4. Present Value
Definition & Meaning
Present value is a forward-looking valuation base. Under this method, assets are carried at the
present discounted value of the future net cash inflows that the item is expected to generate in the
normal course of business. Liabilities are carried at the present discounted value of future net
cash outflows expected to be required to settle the liabilities.
Key Features
• Takes into account the "Time Value of Money" (a rupee today is worth more than a rupee
tomorrow).
• Requires complex calculations involving discounting future cash flows using an appropriate
discount rate.
• Often used for long-term investments, leases, and evaluating long-term projects.
Example: A company expects a machine to generate ₹1,00,000 in cash flows over the next 5
years. Because receiving money in the future is less valuable than having it today, the company
discounts those future earnings to find their value today, which might be calculated as ₹78,000.
This ₹78,000 is the present value.
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