Historical cost is the original price paid to acquire an asset. It is recorded on the balance sheet as the asset’s cost basis and is typically adjusted only for depreciation, amortization, or impairment.
Under U.S. GAAP (Generally Accepted Accounting Principles), assets such as property, plant, and equipment are carried at historical cost less accumulated depreciation; intangible assets are usually capitalized at historical cost and amortized over their useful lives. This cost basis provides an objective, verifiable value that drives depreciation schedules and impairment testing.
Historical cost offers a stable reference point for financial statements, but it may not reflect an asset’s current market value. Analysts often compare historical cost with measures like fair value, which reflects current prices in the market, or replacement cost. Because historical cost does not automatically adjust for inflation or market swings, reported earnings may be affected by depreciation and impairment charges even if the asset’s market price has changed significantly. In GAAP, certain revaluations upward are not routine, so the balance sheet value can lag true economic value.
Example: A company acquires an office building for $2 million. The asset remains recorded at historical cost on the balance sheet, and depreciation is charged against earnings over its useful life.
Cost basis · Fair value · Depreciation · Impairment · Book value · Net book value