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

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.

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