Definition of Historical Cost
Historical cost is a term used instead of the term cost. Cost and historical cost usually mean the original cost at the time of a transaction.
The term historical cost distinguishes an asset’s cost from its replacement cost, current cost, or inflation-adjusted cost.
Generally, the cost principle or historical cost principle requires that an asset should be reported at its cash or cash equivalent amount at the time of the transaction and should include all costs necessary to get the asset in place and ready for use.
Example of Historical Cost
Let’s assume that a company purchased land in 1997 for $100,000. It continues to own the land and has not made any improvements. Today the land should be reported on the company’s balance sheet at its historical cost of $100,000 even though its current cost, replacement cost, inflation-adjusted cost, appraised value, and assessed value amounts range from $150,000 to $270,000.
