Legal Definitions - historical cost

Historical cost refers to the original monetary value of an asset at the time it was acquired. This value includes the purchase price and any additional costs directly attributable to getting the asset ready for its intended use, such as shipping, installation, or legal fees. Under the historical cost principle, assets are recorded on financial statements at this original acquisition cost, regardless of subsequent changes in market value or inflation. This principle provides a reliable and verifiable basis for financial reporting.

Here are some examples illustrating the concept of historical cost:

• Example 1: Manufacturing Equipment

  A manufacturing company purchases a new industrial laser cutter for its production line. The company pays $150,000 for the machine itself, $5,000 for shipping and insurance, and $10,000 for professional installation and calibration by specialized technicians. The historical cost of the laser cutter recorded on the company's financial statements would be the sum of these amounts: $150,000 + $5,000 + $10,000 = $165,000. Even if the market value of similar laser cutters increases or decreases in subsequent years, the company's accounting records will continue to reflect this original combined cost (minus any accumulated depreciation over time).

• Example 2: Commercial Real Estate

  A small business acquires an office building to serve as its new headquarters. The purchase price of the building is $800,000. Additionally, the business incurs $15,000 in legal fees for the property transfer, $5,000 for a property survey, and $10,000 for title insurance. The historical cost of the office building for the business would be $800,000 + $15,000 + $5,000 + $10,000 = $830,000. This is the value at which the building asset would be recorded on the company's balance sheet, regardless of future fluctuations in local real estate market values.

• Example 3: Internally Developed Software

  A technology startup invests in developing a unique customer relationship management (CRM) software platform for its own internal operations. Over a year, the company spends $200,000 on salaries for the software engineers dedicated to the project, $30,000 on specialized development tools and licenses, and $15,000 on external consultants who provided expert architectural design advice. The historical cost of this internally developed software asset would be the total of these direct and attributable expenses: $200,000 + $30,000 + $15,000 = $245,000. This recorded cost forms the basis for its valuation on the company's books, rather than an estimated market value that might be difficult to determine reliably.