Historical Cost Basis (original Cost)
Under the historical cost basis of accounting, assets and liabilities are recorded at their values when first acquired. They are not then generally restated for changes in values.
Costs recorded in the Income Statement are based on the historical cost of items sold or used, rather than their replacement costs.
For example –
- a company acquires an asset in year 1 for $100;
- the asset is still held at the end of year 1, when its market value is $120;
- the company sells the asset in year 2 for $115.
At the end year 1 the asset is recorded in the balance sheet at cost of $100. No account is taken of the increase in value from $100 to $120 in year 1. In year 2 the company records a sale of $115. The cost of sales is $100, being the historical cost of the asset. This gives rise to a profit of $15 which is wholly recognised in year 2.
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