![]() ![]() ![]() However, the Cost Accounting Concept does not reflect the current market’s real value of assets or liabilities. The disadvantage of the Historical Cost Principle: It is a simple method that is easy to understand by management, accountant, and auditor. Verifying the value of assets or liabilities based on a cost basis is much easier than market value. This accounting treatment is also less affected by accounting assumptions. The advantage of the historical cost principle is that the users of financial statements could know exactly the original value of Assets or Liabilities in the financial statements as it requires no adjustments. However, based on IFRS, Building was initially booked at its original cost and then depreciated based on its economic use or at the fair value per the revaluation model. The is no adjustment based on market Value required. Related article Conservatism Principle: Definition | Example | Explanationįor example, the Office Building of ACB Company was originally purchased for $500,000 ten years later, in 2016, the market value of the building is $1,500,000.Īs per US GAAP, this building records $500,000 in its financial statements in 2016. Per US GAAP, the PPE is recorded at the historical cost and required to change the value in the financial statements even if the market value of assets increases or decreases. The value of PPE is stated at the net book value or fair value after valuation. Example of Historical Cost Principle:įor example, under the historical cost principle in IFRS, PPE per IFRS requires to record initially at cost, and the value will be reduced by depreciation or impairment. We want to clarify this because some online resources stated that if the items are recorded at the historical cost, then the value of those items will not change subsequently. Yet, it is the basis on which the value of the items is recorded at the historical cost. It is incorrect to say that the historical cost accounting principle requires no change in the value of items in the Financial Statements. However, some items require no change in their value subsequently. Recognizing some items of assets or liabilities is required to record at the historical cost and the subsequent measure at the fair value. This principle is used in both IFRS (the Principle Base) and US GAAP ( Rule Base). The Historical cost accounting principles are used mainly to record and measure the value of items in the balance sheet rather than items in the Income statements. The concept of the historical cost principle is that the assets are recorded based on the price at the time they are purchased, and the liabilities are recorded based on the values expected to pay at the original value rather than market value or inflation-adjusted value.
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