What Is Historical Cost?
Historical cost is the accounting principle that records an asset on the books at its original purchase price, rather than its current market value. It's a cornerstone of GAAP, valued for being objective and verifiable.
What historical cost is and why it matters
Under the historical-cost principle, an asset stays on the balance sheet at what the company actually paid — a figure backed by an invoice or contract — adjusted only for depreciation or impairment, not for rising market prices. The appeal is reliability: historical cost is a fact that can be verified, whereas market value is an estimate that fluctuates. The trade-off is relevance — a building bought decades ago may be worth far more than its recorded value, so the balance sheet can understate the real worth of long-held assets. Some assets (like certain financial instruments) are exceptions and carried at fair value.
A worked example
A company bought land in 2010 for $200,000. Today, comparable land sells for $500,000. Under the historical-cost principle, the land remains on the balance sheet at $200,000 — its original cost — not the $500,000 market value, because land isn't depreciated and isn't revalued upward under GAAP. The recorded figure is verifiable and objective, even though it no longer reflects current market worth.
How firms handle it today
Firms record assets at cost from purchase documents and carry them at historical cost less depreciation, disclosing fair value only where standards require it.
Related terms
- Book value
- Asset
- Depreciation
- GAAP
- Valuation
FAQ
Why does accounting use historical cost?
Because it's objective and verifiable — backed by an actual transaction — unlike market value, which is an estimate that changes.
What's the downside of historical cost?
It can understate the current worth of long-held assets like real estate, reducing the balance sheet's relevance.
Are all assets recorded at historical cost?
Most are, but some financial assets are carried at fair value under specific accounting standards.