Characteristics of Historical Cost

Characteristics of Historical Cost

Characteristics of historical cost may be expressed in term of measurement bases, initial recognition, widely used etc.  Under historical cost principle assets and liabilities are recognized at original cost. This is not the only bases of measurement and other bases have been explained in my other article.

Important characteristics of Historical cost

Some important characteristics of historical cost have been explained below

1.   Measurement Bases:

Historical cost is an important measurement bases for recognition of financial items. This is not the only measurement bases used in accounting. Accountant also used other measurement bases like market price, replacement cost etc.

2.   Original Price:

Historical cost is simply the original or actual cost of asset. This is the simplest bases among measurement bases and no complexity involved in historical cost calculation or determination.

3.   Initial Recognition:

Many financial items (assets & liabilities) are initially recognized at historical cost like fixed asset , investment and inventories etc. Thus we can say that historical cost has fundamental importance in initial recognition of financial items.

4.   Widely Used:

Historical cost bases are widely used in the recognition of financial items. We can safely say that in more than 95% cases, we will be using historical cost. There are two important bases used in the preparation of financial statements i.e. historical cost and fair value. howsoever, fair value bases are mostly used at the balance sheet date adjustment/reporting.

5.   Characteristics list of Historical cost

Some important characteristics of historical cost are listed below

a)    Historical cost is a measurement bases.

b)   Historical cost is the original price.

c)    Assets & liabilities are stated at historical cost.

d)   Transactions are initially recorded at historical costs.