Understanding the Historical Cost

On june 6, 2011, I published my written lecture on "Difference between the historical cost and fair value" in which I have explained historical cost.

Today, we are trying to explain historical cost more clearly to help you better understand the historical cost and how it helps you in decision making.

Original Cost of any asset or liability is called historical cost. Both assets and liabilities may have historical cost. There will not any changes in this cost when there will change in the market value of same asset or liability due to inflation or deflation. New accounting experts want to change the historical cost method for calculating the value of assets and liabilities but still it is being used for making balance sheet..

Now, we explain the historical cost of different assets :-

1. Historical Cost of Inventory

Historical cost of inventory means buying cost of inventory. As per rule, we calculate value of inventory on the basis of historical cost and market cost which ever will be less. For example, you are wholesaler  you had bought inventory at the cost of $ 100 but today, same inventory, you and other wholesaler are buying on $ 90. So, net realizable value is less than historical cost. So, we will calculate inventory at $90.

2. Historical Cost of Fixed Assets 

Historical cost of any fixed asset will be calculated with following formula.

Purchase price or construction Cost + Direct Expenses for bringing fixed asset in operation + Cost of borrowing to Finance the Same Asset buying or construction - Trade Discount 

3. Historical Cost of Liabilities 

Any loan or other liability which has been by us will be calculated on its historical cost. For example A gave Loan of $ 10,000 to B 5 years. Still B did not return his taken loan to A. Within 5 years, prices have increased almost double due to inflation but still loan cost will be $ 10,000 in both parties book.

Benefit of Historical Cost in Decision Making 

As investor, when you have to analyze the balance sheet for taking investment decision, you have to check every historical cost and try to convert it in fair value. With this, you can find real lose of any asset when we compare historical cost with current value. You can also recreate the balance sheet on the basis changes in price level if you get balance sheet on the basis of historical cost. On the other side, if you're using historical cost method for making balance sheet, you need not to record the gain before selling the asset because you have shown all assets in the book on the historical cost basis.

Thanks for joining us for learning this concept. We hope you found it useful, please feel free to share your thoughts and suggestions on our Accounting Education +page.


Comments on this Website: 1
Share above Content to Your Friends


access account accountant Accounting accounting definitions accounting ebook Accounting education accounting procedure accounting process outsourcing Accounting Software advance advertising africa Amalgamation amendments announcements Annuity assets audit auditing Australia B.Com. balance sheet bank Bank reconciliation banking basic accounting BBA benefits best bill black money blog bloggers book keeping bookkeeping Branch Accounting - full tutorial budget Budget variance business businessman CA calculator canada capital capital budgeting career cash cash book cash flow statement Chiense children china class coaching coins college commerce commerce students company computer computer accounting conference Contact vinod kumar corporate accounting cost cost accounting cost center cost centre CPA credit credit card cs currency data Debit and credit debit cards debt debtor degree depletion depreciation documents dollar domain Downloads Dubai e-accounting earning education Education Loans email employee EPF ERP euromoney examination excel excise duty expenses facebook factor of loan fans feature fifo FII fiji finacle finance Financial financial accounting fire insurance flickr flow forensic forex formula france fraud free fun function fund GAAP GDP gdr germany gold goodwill goodwill accounting google google apps google apps google base google buzz google calendar Google docs google finance google fusion tables google talk govt. GST guide health Hindi Hindi Language history holding company How to treat FBT in Tally 9 HRA ICAI ICAWI ICICI Bank IFRS income income statement Income Tax India indian railway Indonesia inflation inflation accounting infographics information inspiration insurance insurance accounting interest international Internet Introduction of Tally 9 inventory investment invoice IT Japan Job costing journal entries Kalculate keyboard kindle kuwait laptop law LBT learning lease lecture ledger leducation Leverage Analysis liabilities lifo linkedin loan logical point loss loss of profit M.Com. m.phil malaysia management accounting manual accounting manufacturing account market marketing mastercard material MBA MCA media migration mobile money ms word ms. excel multi currency in tally 9 Multicurrency Accounting mutual fund national security new and sacrifice ratio new york times new zealand news NGO nonprofit-accounting North Georgia Mountains NPV NSE odbc office oman online application online accounting otcei pakistan parents pay pal pdf pie chart pie chart of income pnb podcast ppf presentation price privacy policy prize money prof. vinod kumar profit profit and loss account project management provision purchase puzzles quickbooks Quote quotes quotes of svtuition rating agency ratio analysis RBI readers real estate rectification of errors remote control reports reserves responsibility accounting retirement revenue Revenue reserves review risk rupees salary sale saudi arabia saving sbi scholarship school SEBI security service tax share share trading Shares shri lanka singapore sms social accounting society solution South Africa stock stock exchange structure student students study subsidiary company svtuition swiss bank tally tally 9 Tally 7.2 Tally 9 Tally.ERP 9 tanzania tax Tax Accounting TDS teacher teaching technology test testimonial testimonials thailand tips trading trading on equity transaction trend trial balance tuition twitter UAE UGC - NET Commerce UK United Arab Emirates university usa valuation VAT Video Voucher and vouching wikipedia working capital youtube
Accounting Education: Understanding the Historical Cost
Understanding the Historical Cost
Accounting Education
Not found any lecture VIEW ALL Readmore Reply Cancel reply Delete By Home PAGES Lectures View All RECOMMENDED FOR YOU Category ARCHIVE SEARCH ALL Lectures Not found any lecture match with your request, please help to write it and send it to our email at vinod@svtuition.org for making this website free accounting and finance encyclopedia. Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS CONTENT IS PREMIUM Please share to unlock