What is Historical Cost?
Historical cost is an accounting principle that requires companies to record assets and liabilities at their original cost, as opposed to their current market value. This means that the amounts reported on a company's financial statements are based on the prices that were paid when the assets were acquired or the liabilities were incurred, rather than on their current market values.
The historical cost of an asset is the amount of money paid at the time of purchase. It is recorded in the balance sheet at the same cost at which it was purchased. The replacement cost or inflated cost of the asset is not taken into account when reporting. For example, if the land was purchased for $100,000 and its current value is $400,000, the land value of $100,000 will be considered on the balance sheet using the historical cost method.
At the time of purchase, historical cost is easily identifiable and documented. As a result, the historical method is preferred for reporting assets. It is the most traditional method of cost recording, and gains are not recorded until they are realized. The opportunity cost and inflation, on the other hand, are ignored when recording the asset using this method.
Did you know?
The use of the historical cost principle in asset reporting is one of the four basic financial reporting principles. Do you struggle to report your assets in your financial statements? The Nimblefincorp team will assist you in calculating depreciation and reporting your assets in accordance with GAAP.
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