Historical Cost Accounting

Historical cost is a traditional method of recording assets and liabilities at their original or nominal value without making adjustments for inflation. It first came in evidence in Jun 1979 in a French project after numerous debates. The historical cost principle states that the asset should include all cost necessary to get the asset in place and ready for use. The principle of historical cost is based upon two fundamental principles: the principle of monetary standardization and principle of prudence. The principle of monetary standardization ignores the fluctuations in monetary values of asset and liability. The principle of prudence accounts only the losses but ignores potential profit. Assets are evaluated based on acquiring cost, stock is evaluated based on net realizable value or lower cost and debt according to nominal value not present value. Under U.S GAAP ( Generally Accepted Accounting Principles) most assets are recorded at historical cost except for certain financial instruments like trading securities, available for sale securities, derivatives. Under IFRS (International financial Reporting Standards) historical cost is acceptable but not required for property plant and equipment but intangible assets, property, plant and equipment, and investment property may be revalued to fair value. But revaluation will have to be applied to all assets of particular class and they have to make sure this done with regularity so that there is not that large difference between carrying value and market value. Even though in historical cost there is no routine adjustments for inflation but for calculating book value calculations like depreciation, amortization, depletion are done. Historical cost reflects the real value of items at the date of their entering the company. Historical cost is truly more sure, reliable and checkable value. For asset it is the amount paid or to be paid and in case of debt it is the value of equivalents obtained in exchange of