Historical cost – What is historical cost?
Historical cost is the original cost of an asset. It is a key feature of accounting and bookkeeping, as outlined by the cost principle.
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The term historical cost distinguishes the original cost of an asset from other types of costs, including:
- Replacement cost: the amount the same asset would cost today. Replacement cost is sometimes referred to as current cost.
- Inflation-adjusted cost: the value of the asset increased to reflect inflation since the original purchase date.
- Market value: the estimated amount an asset could be sold for, based on how much a buyer would be likely to pay the seller.
The historical cost of an asset can easily be found by referring to sales documents such as invoices or receipts.
The cost principle and historical cost
The cost principle is an accounting guideline which states that assets, liabilities, and equity investments should be recorded at their original - or historical - cost on a company’s financial reports.
‘Original cost’ refers to the initial cost of the asset at the time it was purchased, plus any costs required to get the asset fit-for-purpose.
Historical cost and accounting standards
In the UK, there are two main sets of accounting regulations: the IFRS Standards and the UK GAAP. Both the IFRS and the UK GAAP have specific guidelines for the treatment of assets, and both have different interpretations of historical cost.
According to the UK GAAP, most assets should be reported at historical cost and should not be remeasured to fair value. The only exception is investment property, which must be reported at fair value.
Under the IFRS, assets are usually recorded at historical cost. The only exceptions are PP&E, investment property, biological assets, and certain financial instruments which can be reported according to fair or market value.
Historical cost in financial reports
According to the cost principle, accounting records should report assets at their historical cost; however, it is fairly common for financial reports to show a value that is not the historical cost. This is because the market value of an asset is likely to diverge from the historical cost, making it necessary to adjust the recorded price of an asset.
Historical cost in Debitoor
Keep track of your assets with Debitoor invoicing software. When you create an expense, you will be given the option to mark it as an asset. You can then enter the historical cost and decide whether to apply depreciation.