Difference between revisions of "Historical cost"
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| − | '''Historical cost''' is a fundamental principle of [[accounting]] | + | '''Historical cost''' is a fundamental principle of [[accounting]]. |
| − | + | Under the principle, an asset should never be valued '''''above''''' its initial acquisition cost. The acquisition cost, though, is not limited to only the purchase price; it can also include shipping costs, sales or use tax, and costs to install the item (for example, a piece of machinery). | |
| − | + | However, if the market value of the asset falls below its original cost, it should be reduced to market value, which may be zero in some cases. | |
| − | + | Although this is done on many assets through [[depreciation]] and [[amortization]], and in some cases when [[goodwill]] is impaired, it can also occur in other cases. As an example, a company purchases 1,000 shares of stock at $25/share. Under historical cost, the shares are valued at $25,000. If at year end the stock price is $30/share, the shares are not revalued, but remain on the books at original cost. However, if the shares fall to a drastically reduced level (such as to $5/share, due to underlying problems with the entity), where the likelihood of recovery to the original cost is small, then the company should record a reduction in value. | |
[[Category:Accounting]] | [[Category:Accounting]] | ||
Latest revision as of 02:20, March 2, 2018
Historical cost is a fundamental principle of accounting.
Under the principle, an asset should never be valued above its initial acquisition cost. The acquisition cost, though, is not limited to only the purchase price; it can also include shipping costs, sales or use tax, and costs to install the item (for example, a piece of machinery).
However, if the market value of the asset falls below its original cost, it should be reduced to market value, which may be zero in some cases.
Although this is done on many assets through depreciation and amortization, and in some cases when goodwill is impaired, it can also occur in other cases. As an example, a company purchases 1,000 shares of stock at $25/share. Under historical cost, the shares are valued at $25,000. If at year end the stock price is $30/share, the shares are not revalued, but remain on the books at original cost. However, if the shares fall to a drastically reduced level (such as to $5/share, due to underlying problems with the entity), where the likelihood of recovery to the original cost is small, then the company should record a reduction in value.