Original Cost: Definition, How It Works, and Example Caculation

What Is Original Cost?

Original cost is the total price associated with the purchase of an asset. The original cost of an asset takes into consideration all of the items that can be attributed to its purchase and to putting the asset to use. These costs include the purchase price and such factors as commissions, transportation, appraisals, warranties and installation and testing. Original cost can be used to value an asset type, including equipment, real estate and security instruments.

Original cost is also known as an asset's cost basis for tax purposes.

Understanding Original Cost

Original cost includes all quantifiable facets of a purchased asset. For example, a company purchases of a piece of equipment with a price tag of $20,000. The purchase also involves $1,000 in fees, $700 in shipping and delivery costs, and $3,000 for installation and warranty. The original cost of this piece of equipment would be $20,000 + $1,000 + $700 + $3,000 = $24,700. Also known as historical cost, a common term in generally accepted accounting principles (GAAP), this is the original cost recorded on the balance sheet. The balance sheet and notes to financial statements will separate historical cost property, plant and equipment (PP&E) and accumulated depreciation of these long-term assets. The difference is known as carrying value.

Original Cost and Depreciation

Determining an asset's original cost is important in calculating the asset's tax basis. The original cost of an asset encompasses more than the asset's purchase price, and the costs added together can reduce the potential taxable gain on the sale of the asset. The tax basis can be calculated by taking the original cost and subtracting the accumulated depreciation of the asset.

For the piece of equipment above, suppose accumulated depreciation is $14,700. The carrying value on the company's books would be $10,000 ($24,700 original cost less $14,700 accumulated depreciation). If the company sells the asset for $15,000, it would record a gain on asset sale of $5,000.