Course Outline
Join PRO

What is the advantage of using historical cost on the balance sheet for property, plant and equipment?

Author:
Harold Averkamp, CPA, MBA

Definition of Historical Cost

Historical cost is the original cost of an asset including all the necessary costs to get the asset in place and ready for use. “Historical” means the cost is not adjusted for inflation or for changes in the current value or replacement value of the asset.

For buildings, equipment, fixtures, vehicles, and other long-lived tangible assets other than land, the asset’s historical cost (minus its salvage value) is depreciated over the asset’s useful life and is recorded in a contra asset account Accumulated Depreciation. The balance in Accumulated Depreciation is reported on the balance sheet as a separate deduction from the assets’ historical costs.

Advantage of Historical Cost for Property, Plant and Equipment

An advantage of reporting the historical cost is that the amount is objective, unbiased, verifiable, and therefore easily audited. The reason is that there will be lots of documentation such as contracts, invoices, payments, transfer taxes, and so on. On the other hand, reporting the current value (instead of historical cost) of these assets is more subjective and could lead to some exaggerated amounts.

Outside of the financial statements amounts, companies could get estimated current or replacement values from appraisers.

Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus