What is historical cost?
The historical cost of an asset in accounting represents its initial purchase price or its original monetary value. Guided by the historical cost principle, business transactions are documented based on their original costs. This principle aligns with the broader cost principle, which underscores the importance of recording assets, equity investments, and liabilities at their respective acquisition costs.
Retrieving an asset's original cost is generally straightforward, assuming proper records have been maintained. Documentation related to trade, sales, or purchases is instrumental in ascertaining the historical cost of an asset. It is crucial, however, to recognize that the historical cost may not always provide an accurate portrayal of the asset's current fair value.
Historical Cost Explained
In compliance with accounting principles, historical expenditures necessitate certain adjustments over time. Depreciation expenses are meticulously documented for long-term assets, thereby reducing their recorded value throughout their estimated useful life spans.
Furthermore, in instances where an asset's value plunges below its depreciation-adjusted cost, an impairment charge is requisite to lower the recorded cost of the asset to its net realizable value. Both these concepts aim to offer a cautious perspective on the recorded cost of the asset.
Historical costs differ from various other costs linked to an asset, including its replacement cost (the current cost for purchasing the same asset) or its inflation-adjusted cost (the initial purchase price incorporating cumulative upward changes due to inflation from the purchase date).
While historical costs remain a fundamental principle for asset valuation, the notion of fair value is supplanted by alternative asset forms, such as marketable investments. The ongoing substitution of historical costs with an equitable valuation premise is based on the premise that historical costs present an unduly restrictive depiction of the company