What is historical cost?

Historical cost is the original cost of an asset, as recorded in an entity's accounting records. A historical cost can be easily proven by accessing the source purchase documents, but 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.

Historical cost requires some adjustment over time. You will need to record depreciation expense 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, then you must take an impairment charge to bring the recorded cost of the asset down to its net realizeable value.

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. Access the cost principle link for a thorough discussion of the principle.

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.

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Comments

[Rahul]

Any idea if this is related to Cost Concept ?

[Steve Bragg]

You are looking for the cost principle, which is located at:

http://www.accountingtools.com/cost-principle