## 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.

Next Up

## BREAKING DOWN '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.

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.

RELATED TERMS
1. ### Carrying Value

An accounting measure of value, where the value of an asset or ...
2. ### Historical Cost

A measure ofÂ value usedÂ in accountingÂ in whichÂ the price of an ...
3. ### Fixed Asset

A fixed asset is a long-term tangible piece of property that ...
4. ### Capitalized Cost

A capitalized cost is an expense that is added to the cost basis ...
5. ### Origination Points

A type of fee borrowers pay to lenders or loan officers to compensate ...
6. ### Depreciation Recapture

Depreciation recapture is the gain received from the sale of ...
Related Articles
1. Investing

### Depreciation: Straight-Line Vs. Double-Declining Methods

Appreciate the different methods used to describe how book value is "used up".
2. Investing

### An Introduction To Depreciation

Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
3. Investing

### Know Your Cost Basis For Bonds

Nobody likes taxes, but tax reporting is an inevitable and unavoidable part of investing. If you buy stock, determining your costs basis is a slightly frustrating but fairly straightforward exercise. ...
4. Investing

### How Depreciation Works on a Rental Property

One of the advantages of owning rental real estate is the depreciation tax deduction.
5. Investing

### Book Value: How Reliable Is It For Investors?

In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
6. Managing Wealth

### 6 Asset Allocation Strategies That Work

Your portfolioâ€™s asset mix is a key factor in its profitability. Find out how to achieve this delicate balance.
7. Managing Wealth

### Comparing Tangible and Intangible Assets

Tangible assets are physical assets such as land, vehicles or equipment.
8. Taxes

### Filling out Form 4562, step-by-step

Step-by-step, how to fill out the depreciation and amortization form for your business tax return.
RELATED FAQS
1. ### When should I use depreciation expense instead of accumulated depreciation?

Distinguish differences between depreciation expense, which is reported on the income statement, and accumulated depreciation ... Read Answer >>
2. ### How does accumulated depreciation affect net income?

Learn why accumulated depreciation does not directly affect a company's net income; understand where a company accounts for ... Read Answer >>
3. ### What is property, plant and equipment, and what does it mean?

Property, plant and equipment (PP&E) is a term that describes an account on the balance sheet. The PP&E account is a summation ... Read Answer >>
4. ### What are some examples of the main types of capital expenditures (CAPEX)?

Learn about different expenses with acquiring assets that are considered capital expenditures and should be depreciated over ... Read Answer >>
5. ### How do I figure out my cost basis on a stock investment?

The cost basis of any investment is the original value of an asset adjusted for stock splits, dividends and capital distributions. ... Read Answer >>
Hot Definitions
1. ### Working Capital

Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
2. ### Bond

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
3. ### Compound Annual Growth Rate - CAGR

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
4. ### Net Present Value - NPV

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
5. ### Price-Earnings Ratio - P/E Ratio

The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
6. ### Internal Rate of Return - IRR

Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.