Historical Cost Accounting Concept

HISTORICAL COST CONCEPT

• Assets, services recorded at price or sacrifice incurred to acquire them. This is called COST.

• Changes in value of non-monetary assets ignored.

• Exchange values are ignored

• Historical cost is the term usually applied.

NOTES:

This concept basically does not encourage the use of current cost or replacement cost. Hence, it does not look into what the assets might have cost when we need to replace it. Only, the price paid is recorded.

ILLUSTRATION

Company A has a piece of property purchased quite a few years ago. The price paid for this property was $1 million. But, some real estate agents inform the company that now the property can be sold many times more than this $1million.

Question: Should the company continued to record in its financial statement, its property at the amount of $1million which was the price that was paid to acquire this land.

Answer: Based on historical cost concept, the company shall still continue to record the value of $1 million in its financial statement.

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