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Overview of Original Cost
Definition of
Original Cost
What is Original Cost? Original Cost, also commonly referred to as Historical Cost, is a fundamental accounting principle which dictates that assets should be recorded on a company's Balance Sheet at their initial purchase price or acquisition cost. This is the amount paid to acquire the asset, including any costs necessary to get it ready for its intended use (e.g., transportation, installation). This original cost then serves as the basis for subsequent accounting treatments, such as calculating depreciation for tangible assets or amortization for certain intangible assets.
Activities Related to
Original Cost
Here is a list of Original Cost related activities:Â Recording the purchase of assets at their acquisition price, Including all necessary costs (shipping, installation) in the initial asset value, Using the original cost as the basis for calculating depreciation or amortization over the asset's useful life, Maintaining asset records that show the original cost and accumulated depreciation/amortization, and Reporting assets on the balance sheet at their original cost less accumulated depreciation/amortization (book value). This adheres to the Cost Principle.
The Importance of
Original Cost
The Original Cost principle is important in accounting because it provides an objective and verifiable basis for valuing assets. Since the purchase price is typically supported by documentation (like an invoice or contract), it is a reliable figure. This objectivity ensures consistency and comparability in financial statements over time and between different companies. While original cost does not reflect an asset's current market value (which can fluctuate), it is a cornerstone of Generally Accepted Accounting Principles (GAAP) for asset recording and the subsequent calculation of depreciation or amortization expense.
Key Aspects of
Original Cost
Historical Value
Assets are recorded at the price paid at the time of their acquisition.
Objectivity and Verifiability
The cost is typically supported by objective evidence, making it reliable and auditable.
Basis for Depreciation/Amortization
Serves as the starting point for systematically allocating an asset's cost over its useful life.
Does Not Reflect Current Value
The original cost recorded on the balance sheet may not represent the asset's current market or replacement value, which can be a limitation for certain types of analysis.
Concepts Related to
Original Cost
Original Cost is also known as the Historical Cost Principle, a fundamental tenet of GAAP. It applies to the valuation of Assets, both Tangible Assets (subject to Depreciation) and Intangible Assets (subject to Amortization). The original cost, less accumulated depreciation/amortization, yields the asset's book value on the Balance Sheet.
Original Cost
in Action:
The Adventures of Coco and Cami
When Coco buys her new sandwich oven and Cami gets her espresso machine, Professor A explains that they must record these assets in their books at their Original Cost – exactly what they paid for them.
Learn with Coco and Cami why this initial price is so important for their financial records, even if the equipment's market value changes over time, and how it's used for calculating depreciation.