Historical Cost
IntermediateHistorical cost is the accounting practice of recording an asset at the price originally paid for it, rather than at its current market value.
When a company buys a building, machine or piece of land, it records the asset at the amount it actually paid, including costs needed to get it ready for use, such as delivery and installation. That figure stays as the starting point in the accounts, even if the asset's market value later rises or falls.
For example, a company that bought land for 500,000 twenty years ago may still show it at 500,000, even though similar land nearby now sells for 2 million.
Historical cost has a big advantage: it is objective and easy to verify, because it is backed by an invoice or contract. It does not depend on estimates or opinions about what an asset might be worth today.
Its weakness is that it can become out of date. Balance sheets based on historical cost may understate the value of long-held assets, especially property, and do not reflect inflation. That is why accounting standards allow or require fair value for some assets, such as many financial investments, and require write-downs when an asset's value falls below its recorded amount.
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