Historical cost principle

Definition

The historical cost principle is an accounting concept that requires assets to be recorded at their original purchase price. This value remains on the financial statements and does not change with market value fluctuations.

5 Must Know Facts For Your Next Test

1. Assets are recorded at their original cost, not their current market value.
2. The historical cost principle ensures consistency and reliability in financial reporting.
3. Depreciation is calculated based on the historical cost of an asset.
4. This principle is a fundamental aspect of Generally Accepted Accounting Principles (GAAP).
5. Historical cost provides verifiable evidence, as it is based on actual transactions.

Review Questions

• Why are assets recorded at their original purchase price according to the historical cost principle?
• How does the historical cost principle contribute to consistency in financial statements?
• What basis is used for calculating depreciation under the historical cost principle?

Related terms

Fair Value:

The estimated market value of an asset at a given point in time.

Depreciation:

An accounting method of allocating the cost of a tangible asset over its useful life.

GAAP (Generally Accepted Accounting Principles): A set of accounting standards and principles used for financial reporting in the United States.