Historical Cost

What is Historical Cost?

Historical Cost is an accounting principle that requires companies to record assets on their balance sheet at the original cost spent to acquire them. This cost includes the purchase price of the asset and any additional expenses related to acquiring the asset, like transportation, installation, or setup fees.

Short Description: An accounting principle where assets are recorded at their original purchase price.

• Original Value: Reflects the initial purchase price and the costs directly attributable to bringing the asset into use.
• Stability: Provides a stable measurement of assets as it avoids frequent changes based on market value fluctuations.
• Impairment and Depreciation: Although recorded at historical cost, assets may be adjusted for impairment or depreciated over their useful life in financial records.

The historical cost principle is crucial because it offers clarity and reliability in financial reporting, though it may not reflect the current market value of an asset.