Reviewed by Aug 27, 2020| Updated on
Definition of Historical Cost
Historical cost is a calculation of the value used in the accounting process, in which the asset’s value on the balance sheet is reported at its original cost as purchased by the corporation.
Let Us Understand Historical Cost in Detail
According to accounting principles, historical expenses require a certain amount of change as time passes. Depreciation costs are recorded for longer-term assets, thus decreasing their recorded value over their estimated useful lives. Also, if the value of an asset falls below its depreciation-adjusted cost, an impairment charge must be levied to reduce the recorded cost of the asset to its net realizable value. Both concepts are intended to provide a conservative view of the recorded cost of the asset.
Historical costs vary from a number of other costs that can be attributed to an asset, such as its replacement cost (what you will now pay to buy the same asset) or its inflation-adjusted cost (the actual purchase price with accumulated upward inflation changes from the date of purchase).
Historical costs are still a core principle for the valuation of assets, while fair value is replaced by other forms of assets, such as marketable investments. The continuing replacement of historical costs by a measure of equal value is based on the premise that historical costs pose an unnecessarily restrictive representation of the company.
Historical Cost Versus Asset Impairment
Irrespective of physical wear and tear deterioration of assets over long periods of use, loss can occur in some properties, including intangible assets such as goodwill. With asset loss, the fair market value of the asset fell below what was originally displayed on the balance sheet. The asset impairment charge is a typical restructuring cost as companies reassess the value of certain assets and make changes to the business.
Goodwill, for example, must be checked and assessed at least regularly for any disability. When the value of the asset is less than the carrying value of the property, the asset is deemed damaged. If the value has that, no change will be made to the historical expense. In the case of loss, the devaluation of an asset on the basis of current market conditions will be a more prudent accounting procedure than holding historical costs unchanged. If the asset is written off due to the failure of the asset, the loss directly affects the income of the business.