What is Original Cost?

Original cost is the price paid to initially acquire an asset. This cost is considered to include the cost to buy an asset, transport the asset to where it is intended to be used, install it, and test it. Original cost also includes sales taxes and other levies. Original cost is the cost at which an asset is recorded in the general ledger. It may subsequently be reduced in the general ledger if the market value of the asset is less than its depreciated cost or amortized cost.

Characteristics of Original Cost

The original cost concept has the following characteristics:

Historical basis. Original cost refers to the actual amount paid for an asset at the time of acquisition. It represents the historical purchase price without adjustments for inflation or current market conditions.
Objective and verifiable. Since original cost is based on documented transactions (e.g., invoices, receipts), the original cost is objective, reliable, and can be easily verified.
Includes all acquisition costs. The original cost includes not only the purchase price but also any additional costs directly associated with bringing the asset to usable condition, such as transportation, installation, and legal fees.
Does not reflect current value. A limitation of original cost is that it does not account for changes in the asset's value due to depreciation, market conditions, or obsolescence, which may reduce its relevance for decision-making purposes.
Applicability to all asset types. Original cost applies to both physical assets like machinery, buildings, and equipment, and intangible assets such as patents and copyrights.
Supported by accounting standards. The original cost concept is commonly required by accounting standards such as GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) for initial asset recognition in financial statements.

Example of Original Cost

Baltimore Corporation purchases a large production machine for $50,000. Additional costs associated with this purchase are $1,000 in sales tax, a $2,000 freight delivery charge, $4,000 for the pouring of a concrete pad, and $1,500 for electrical wiring. The aggregate total of these costs is an original cost for the machine of $58,500.