The main advantage of using historical cost on the balance sheet for property, plant and equipment is that historical cost can be verified generally, the cost at the time of purchase is documented with contracts, invoices , payments, transfer taxes, and so on. Advantages and disadvantages of historical cost accounting historical cost accounting has been a controversial method that experienced many criticisms over a period of time, especially since it considers the acquisition cost of an asset and does not recognize the current market value merits and demerits of this method are as follows. The historical-cost method is used for assets in the us under generally accepted accounting principals (gaap) based on the historical-cost principle, under us 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. The principle of historical cost is still used in accounting when there is a large measure of agreement that it is inappropriate discuss (2005, september 29.
The historical-cost method is used for assets in the united states under generally accepted accounting principles (gaap) for example, if a company's main headquarters, including the land and building, was purchased 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. In accounting under the traditional historical cost paradigm, historical cost is the original nominal monetary value of an economic item historical cost is based on the stable measuring unit assumption. More about the principle of historical cost is still used in accounting when there is a large measure of agreement that it is inappropriate discuss accounting measures of corporate liquidity, leverage and costs of financial distress.
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. Various corrections to historical cost are used, many of which require the use of management judgment and may be difficult to verify the trend in most accounting standards is a move to more accurate reflection of the fair or market value, although the historical cost principle remains in use, particularly for assets of little importance. Over the years accounting bodies have introduced a number of alternative accounting methods to historical cost accounting opportunity costs are commonly used in economics and do not have much relevance here, however accounting bodies and academic commentators have forwarded new methods of accounting using the current asset value, as opposed to the conventional acquisition cost.
The main advantage of using historical cost on the balance sheet for property, plant and equipment is that historical cost can be verified generally, the cost at the time of purchase is documented with contracts, invoices, payments, transfer taxes, and so on. Historical cost is a term used instead of the term cost cost and historical cost usually mean the original cost at the time of a transaction the term historical cost helps to distinguish an asset's original cost from its replacement cost, current cost, or inflation-adjusted cost.
The principle of historical cost is still used in accounting when there is a large measure of agreement that it is inappropriate discuss. The historical cost principle states that businesses must record and account for most assets and liabilities at their purchase or acquisition price in other words, businesses have to record an asset on their balance sheet for the amount paid for the asset the asset cost or price is then never adjusted for changes in the market or economy and changes due to inflation.
The historical cost principle follows the accounting quality of reliability since everyone can agree on the original purchase price of an asset however, the historical price is not necessarily relevant information.
The cost principle or historical cost principle states that an asset should be reported at its cost (cash or cash equivalent amount) at the time of the exchange transaction and should include all costs necessary to get the asset in place and ready for use.