Historical Cost


DEFINITION of 'Historical Cost'

A measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. The historical-cost method is used for assets in the U.S. under generally accepted accounting principals (GAAP).


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BREAKING DOWN 'Historical Cost'

Based on the historical-cost principle, under U.S. GAAP, most assets held on the balance sheet are to be recorded at the historical cost even if they have significantly changed in value over time.

For example, say the main headquarters of a company, which includes the land and building, was bought for $100,000 in 1925, and its expected market value today is $20 million. The asset is still recorded on the balance sheet at $100,000.

Not all assets are held at historical cost. For example, marketable securities are held at market value on the balance sheet.

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  1. How is market to market accounting different than historical cost accounting?

    Historical cost accounting and mark-to-market, or fair value, accounting are two methods used to record the price or value ... Read Full Answer >>
  2. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  3. Does working capital include prepaid expenses?

    The calculation for working capital includes any prepaid expenses that are due within one year, since such prepaid expenses ... Read Full Answer >>
  4. Does working capital include short-term debt?

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  5. Do dividends affect working capital?

    Regardless of whether cash dividends are paid or accrued, a company's working capital is reduced. When cash dividends are ... Read Full Answer >>
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    Prepayments, or prepaid expenses, are typically included in the current assets on a company's balance sheet, as they represent ... Read Full Answer >>

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