Loading the player...

What is a 'Historical Cost'

A historical cost is 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 United States under generally accepted accounting principles (GAAP).

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.

BREAKING DOWN 'Historical Cost'

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

Asset Depreciation

The historical-cost principle is one of the four basic accounting principles. Valuing assets at historical cost prevents overstating an asset's value when asset appreciation may be the result of volatile market conditions. Furthermore, observing the conservatism constraint in accounting, any asset depreciation must be noted and compared to the asset's historical cost. This is true for many long-lived fixed assets such as buildings and machinery. On the balance sheet, annual depreciation is accumulated over time and recorded below an asset's historical cost. The subtraction of the total depreciation from the historical cost results in a lower net asset value, ensuring no overstatement of an asset's true value.

Asset Impairment

Independent of asset depreciation from physical wear and tear over long periods of asset uses, asset impairment may occur to certain assets, including intangibles such as goodwill. With asset impairment, an asset's market value has become worth less than what is originally listed on the balance sheet. Asset impairment charge is a typical restructuring cost as companies reevaluate the value of certain assets and make business changes. In this case, the devaluation of an asset based on present market conditions would be a more conservative accounting practice than keeping the historical cost intact. When an asset is written off due to asset impairment, the loss directly reduces a company's profits.

Mark-to-Market

The mark-to-market practice is known as fair value accounting whereby certain assets are recorded at their market value. This means that when the market moves, the value of an asset as reported in the balance sheet may go up or down. The deviation of the mark-to-market accounting from the historical-cost principle is actually helpful to report on held-for-sales assets. An asset's market value can be used to predict future cash flow from potential sales. A common example of mark-to-market assets would be marketable securities held for trading purposes. As the market swings, securities are marked upward or downward to reflect their true value under a given market condition.

RELATED TERMS
  1. Impaired Asset

    A company's asset that is worth less on the market than the value ...
  2. Asset

    1. A resource with economic value that an individual, corporation ...
  3. Asset Valuation

    A method of assessing the worth of a company, real property, ...
  4. Long-Term Assets

    1. The value of a company's property, equipment and other capital ...
  5. Level 3 Assets

    Level 3 assets are assets whose fair value cannot be determined ...
  6. Tangible Asset

    A tangible asset is an asset that has a physical form, and includes ...
Related Articles
  1. Investing

    Mark-To-Market Accounting

    "Mark-to-market" accounting is a way of valuing assets based on how much they could sell for under current market conditions. In recent decades, it has become the standard way to record financial ...
  2. Investing

    How Is Impairment Loss Calculated?

    Impairment loss is the decrease in an asset’s net carrying value that exceeds the future undisclosed cash flow it should generate.
  3. Investing

    Mark-To-Market: Tool Or Trouble?

    Mark-to-market accounting can be a valuable practice, but all bets are off when the market fluctuates wildly.
  4. Investing

    How to Evaluate a Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  5. Investing

    Goodwill vs Other Intangible Assets: What's the Difference?

    "Intangible" assets don't possess physical substance. Yet they are quanitfiable, and of great importance to any business.
  6. Investing

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  7. Taxes

    Deferred Tax Asset

    A Deferred Tax Asset is an asset on a company’s balance sheet that may be used to reduce taxable income. It is the opposite of a deferred tax liability, which describes something that will increase ...
  8. Managing Wealth

    How to Calculate Your Tangible Net Worth

    You can calculate your tangible net worth with a simple equation.
RELATED FAQS
  1. How do you write off impaired assets from the financial statement?

    Learn what an impaired asset is and how it effects a company's financial statements. Understand how an accountant writes ... Read Answer >>
  2. What is the difference between carrying value and market value?

    Understand the difference between carrying value and market value. Learn when a company uses carrying value to value an asset ... Read Answer >>
  3. How do you account for changes in the market value of various fixed assets?

    Understand how to account for changes in the fair market value of a company's fixed assets. Learn what accounting methods ... Read Answer >>
  4. How is impairment loss calculated?

    Learn how companies re-evaluate their assets and compare them against book values to recognize impairment and why this strategy ... Read Answer >>
  5. How do businesses determine if an asset may be impaired?

    Find out how a business should determine if an asset may be impaired in accordance with the generally accepted accounting ... Read Answer >>
  6. What is the difference between a fixed asset and a current asset?

    Discover the difference between fixed assets and current assets and the value of each to a company. Learn the category and ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center