Posted in Finance, Accounting and Economics Terms, Total Reads: 885
Definition: Historical Cost
In accounting, historical cost of an asset is the amount paid in order to buy that asset. It is recorded in the balance sheet against that particular asset and remains constant year after year even if the market value of the asset varies.
This is in accordance with the US Generally Accepted Accounting Principals (GAAP).
e.g.) If a company buys a piece of land at a cost of $200000 in 2001, it is recorded in the balance sheet of the year 2001 at that value. Even if the price of the land appreciates (or depreciates) in the future, it is recorded in the balance sheets of subsequent years at its cost price only. Thus, though the same land can be sold at a price of $400000 in 2006, its value remains to be equal to $200000 in the balance sheet of the year 2006.
Historical cost is the characteristic of non-monetary assets like land, building, equipment etc. It is very easy to accurately value the monetary assets at the current market price. However, objective valuation of the non-monetary assets at the market price is very difficult. So, to avoid ambiguity in accounting practices, it is safer to record non-monetary assets at their historical costs in the financial statements.