What is the Historical Cost Principle?

//What is the Historical Cost Principle?
What is the Historical Cost Principle? 2017-10-04T23:00:17+00:00

Definition: The historical cost principle is an accounting guideline which states that all assets must be recorded at cash value, on the date they were acquired. This also applies to equity and liabilities. This means that any asset the company purchases should be rerecorded on the actual date of the purchase at the price the company actually paid for it.

What Does Historical Cost Principle Mean?

What is the definition of historical cost principle? The cost principle is a standard a guideline used by accountants around the world and is part of the GAAP conceptual framework. It ensures that all the information being displayed on a company’s financial statements regarding the value of any asset, equity, or liability reflects the reality of the underlying transactions.

Also, this practice reduces the possibilities of miss valuing a given asset, since the price used to record the transaction will be the actual price paid. As for equity and liabilities, transactions must be recorded on the date they were received at the original acquisition cost.

Let’s take a look at an example.

Example

The accounting department of Practical Example LLC receives an invoice for the purchase of an office printer. The printer was bought on June 25, 2016 and the cost of the printer was $1,350; however, the invoice was received on June 28, 2016. The accounting department must decide what the proper date to record this transaction is.

According to the cost principle, the purchase must be recorded on the date of its occurrence at the cash amount paid. In this case, even though the invoice was received on a different date, the record date must be the one at which the purchase occurred.

Thus, the accounting department of Practical Example LLC must record the printer as a fixed asset purchased on June 25, 2016 for $1,350 by debiting the asset account for $1,350 and crediting the cash account for the same.

Summary Definition

Define Historical Cost Principle: The cost principle means businesses must record transactions in their accounting records for the amount actually paid in the transaction.