Realization concept closely follows the cost concept. Any change in value of an asset is to be recorded only when the business realizes it.
What is realization concept ?
Realization concept closely follows the cost concept. Any change in value of an asset is to be recorded only when the business realizes it.
Further, when an asset is recorded at its historical cost of ₹5,00,000 and even if its current cost is ₹15,00,000 such change is not counted unless there is certainty that such change will materialize.
However, accountant follow a more conservative path. They try to cover all probable losses but do not count any probable gain.
This is to say , if accountants anticipate decrease in value they count it . But if there is increase in value they ignore it until it is realized. Economist are highly critical about the realization concept. According to them , this concept creates value distortion and makes accounting meaningless.
Example:
Mr. Punit purchased a piece of land on 1.01.2001 paying ₹20,00,000 . Its current market value is ₹60,00,000 on 31.12.2023. Should the accountant show the land at ₹20,00,000 following cost concept and ignoring 40,00,000 value increase since it is not realized? If he does so, the financial position would be:
BALANCE SHEET
| Liabilities | ₹ | Assets | ₹ |
| Capital | 20,00,000 | Land | 20,00,000 |
| 20,00,000 | 20,00,000 |
Is it not proper to show it in the following manner?
BALANCE SHEET
| Liabilities | ₹ | Assets | ₹ |
| Unrealized Gain | 40,00,000 | Land | 60,00,000 |
| Capital | 20,00,000 | ||
| 60,00,000 | 60,00,000 |
Now a days revaluation of assets has become a widely accepted practice when the change in value is of permanent nature . Accountant adjust such value change through creation of revaluation (capital) reserve.
Thus the going concern, cost concept and realization concept gives the valuation criteria.
Refer: https://taxandfinanceguide.com/money-measurement-concept/
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