Historical cost can be defined as the value of the resource given up or the liability that incurred at the time when the resource was given up. The liability may incur in order to acquire the asset or the service when the resource was given up and the liability was being incurred.
Principle of Historical Cost
Historical cost can also be defined as an accounting principle where the assets of the company are listed on the balance sheet of the company at the actual value at which they were purchased rather than recording the assets at the current market value of the assets. The historical cost concept is actually used to find out the amount of capital that is required in order to acquire an asset or a service. The principle of historical cost is important as it helps in calculating the profit associated with the acquisition and changes in the profit and expenses since the assets were purchased. In addition to that the historical cost concept is also used for determining the past opportunity costs associated with the assets.
The method of historical cost is used under US generally accepted accounting principles or GAAP.
What actually is the Historical Cost?
The concept of the historical cost is that most of the assets on the balance sheet are recorded on the cost at which they were purchased whether they have increased in the value in the market by now. For example let’s take an example of the headquarters of a company ABC that was purchased for $100,000 in year 1988 and the market value of the building including land is now 20 million dollars. However in balance sheet the asset is still recorded in the same price of $100,000.
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