Historical Cost

Question 1

What is it?

Answer 1

Valuing and recording an asset at the original purchase price.

Recorded at historical cost even if the value of the asset has significantly changed over time.

Question 2

Pros

Answer 2

Simple and certain

Easy to provide records to back-up numbers

Provides basic reasoning and principles

Usually no estimates involved

Best suited for manufacturing and trading businesses dealing with tangible products and engaged in repetetive activities.

Simple methods to write off value as the asset is used up.

Question 3

Cons

Answer 3

Does not take change in value into consideration as they fluctuate over time.

Shift in economic activity from tangible goods to intangible. Goodwill, patents, personal skills are hard to value. There is an exercise in imagination rather than judgment. And how are they to be depreciated.

Limitations due to basic reasoning and principles. Many industry-specific rules have had to be put in place.