Why Assets Are Recorded At Historical Cost

 

Assets are recorded at historical cost on balance sheet because to show that cost at which, firstly, assets are acquired by the business as a historical record and to compare this cost with fair market value and book value of assets over a period of time.

It is also the requirement of Cost Principle which states that assets should be recorded initially at historical costs at which these are acquired by business.

With the passage of time, the value of assets is depreciated or appreciated, but historical cost is used to show the original cost at which these are acquired in order to make comparison it with fair market value and book value.

However, this cost principle lacks in providing updated value of assets prevailing in the market and as a result fails to convince the investors, shareholders and other users of financial statements about realistic and up to date information. For example, if the value of building is appreciated to Rs. 10 million, then the company’s balance sheet still shows the historical cost of Rs. 1 Million. It is okay to show historical cost of assets along with fair market value and book value but to show only historical cost in spite of appreciation in the value of assets is not considered as reliable and correct.