Explain the historical cost concept as it applies to long-term operational assets.
The historical cost concept refers to the long-term operational assets be documented at the amount in which they are paid for. This amount will show on the balance sheet as long as the asset is owned. In time, the asset may rise or even decrease in value, but this variation is not reflected on the accounts of the business. The historical cost of assets can be reduced due to depreciation over time. According to Edmonds (2010), “The historical cost concept requires that most assets be reported at the amount paid for them (their historical cost) regardless of increases in market value” (pg. 13).
Why is the book value of an asset likely to be different from the current market value of the asset?
In order to understand why the book value of an asset likely to be different from the current market value of the asset, one must first understand the terms. Palmiter, A. R. (2003), describes, “Book value is simply the amount that the company's assets (net of depreciation, depletion and amortization) and total liabilities -- as carried on the company's balance sheet. (Sometimes book value is referred to as net book value, net worth or shareholders' equity.) Taking the value of real assets and subtracting any debt can determine the book value. The current market value
Palmiter, A. R. (2003). 5.1.1 - Book value. Wake Forest Student, Faculty and Staff Web Pages. Retrieved September 10, 2013, from http://users.wfu.edu/palmitar/Law&Valuation/chapter%205/5-1-1.htm
Edmonds, Olds, McNair and Tsay. (2010). Survey of Accounting. McGraw-Hill/Irwin. New York, NY.
Historical cost. (n.d.). Princeton University - Home. Retrieved September 9, 2013, from... [continues]
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