Historical cost

Historical cost is the original cost of an asset, as recorded in an entity's accounting records. Many of the transactions recorded in an organization's accounting records are stated at their historical cost. The historical cost concept is clarified by the cost principle, which states that you should only record an asset, liability, or equity investment at its original acquisition cost.

A historical cost can be easily proven by accessing the source purchase or trade documents. However, historical cost has the disadvantage of not necessarily representing the actual fair value of an asset, which is likely to diverge from its purchase cost over time.

According to the accounting standards, historical costs require some adjustment as time passes. Depreciation expense is recorded for longer-term assets, thereby reducing their recorded value over their estimated useful lives. Also, if the value of an asset declines below its depreciation-adjusted cost, one must take an impairment charge to bring the recorded cost of the asset down to its net realizeable value. Both concepts are intended to give a conservative view of the recorded cost of an asset.

Historical cost differs from a variety of other costs that can be assigned to an asset, such as its replacement cost (what you would pay to purchase the same asset now) or its inflation-adjusted cost (the original purchase price with cumulative upward adjustments for inflation since the purchase date).

Historical cost is still a central concept for recording assets, though fair value is replacing it for some types of assets, such as marketable investments. The ongoing replacement of historical cost by a measure of fair value is based on the argument that historical cost presents an excessively conservative picture of an organization.

Related Courses

Cost Accounting Fundamentals