Historical Cost
In accounting, historical costs is the original monetary value of an economic item. Historical cost is based on the stable measuring unit assumption. In some circumstances, assets and liabilities may be shown at their historical cost, as if there had been no change in value since the date of acquisition. The balance sheet value of the item may therefore differ from the "true" value.
While historical cost is criticised for its inaccuracy (deviation from "true" value), it remains in use in most accounting systems. Various corrections to historical cost are used, many of which require the use of management judgment and may be difficult to implement or verify. The trend in most accounting standards is a move to more accurate reflection of the fair or market value, although the historical cost principle remains in use, particularly for assets of little importance.
Depreciation affects the carrying value of an asset on the balance sheet. The historical cost will equal the carrying value if there has been no change recorded in the value of the asset since acquisition. Improvements may be added to the cost basis of an asset.
Historical cost does not generally reflect current market valuation. Alternative measurement bases to the historical cost measurement basis, which may be applied for some types of assets for which market values are readily available, require that the carrying value of an asset (or liability) be updated to the market price (mark-to-market valuation) or some other estimate of value that better approximates the real value. Accounting standards may also have different methods required or allowed (even for different types of balance sheet variable real value non-monetary assets or liabilities) as to how the resultant change in value of an asset or liability is recorded, as a part of income or as a direct change to shareholders' equity.
The Constant Item Purchasing Power Accounting model is an International Accounting Standards Board approved alternative basic accounting model to the traditional Historical Cost Accounting model.
Read more about Historical Cost: Historical Cost Basis (original Cost), IASB Approved Alternative To Historical Cost Accounting, Advantages and Disadvantages of Historical Cost Accounting
Famous quotes containing the words historical and/or cost:
“Some of us still get all weepy when we think about the Gaia Hypothesis, the idea that earth is a big furry goddess-creature who resembles everybody’s mom in that she knows what’s best for us. But if you look at the historical record—Krakatoa, Mt. Vesuvius, Hurricane Charley, poison ivy, and so forth down the ages—you have to ask yourself: Whose side is she on, anyway?”
—Barbara Ehrenreich (b. 1941)
“I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant. Economy is idealism in its most practical terms.”
—Calvin Coolidge (1872–1933)