What is the principle of historical costs?
Accounting has many rules and regulations that companies must comply with when recording and reporting financial information. These include the principle of historical costs, one of the most important concepts concerning the company's financial statements. This principle requires the company to report the historical costs of specific assets such as receivables, supplies and property, plants or equipment. The result is the original price paid for the item or the original money expected for payment in terms of receivables. Although the principle of historical costs is one of the most common accounting standards, it is not without its critics.
Historical costs in many cases are the basis of standard accounting procedures. The company fills in its balance sheet with items that own and uses. These items fall into the asset part in the balance sheet. Each item is recorded here at its historical costs, so that the parties involved know the monetary value of each item. Historical costs of items in the balance sheet compensate for the valueLabels and own capital in a financial statement.
The two most common current assets recorded as historical costs are receivables and supplies. Receivables represent the money owed by customers. The principle of historical costs dictates that the company records each of these transactions as the actual amount of money. No changes or changes are required for inflation; Values are actually. Inventory balance works in a very similar way; The original amount paid is the value specified in the balance sheet of the company.
Long -term assets operate in a similar way in terms of the principle of historical costs. The purchase price for each item - whether plant, property or equipment - goes to the balance sheet for the amount paid by the company. Changes for depreciation go to a separate Contra account just below the corresponding assets account. This allows stakeholders to assess the actual accounting value kaŽDý asset. Not all assets have a corresponding Contra asset; In addition, some companies can associate the account of assets and counter and assets for financial reporting.
The main disadvantage of the principle of historical costs is the inability of the standard to reflect a change in the cost of alternative assets. For example, historical costs are usually not what the company would pay for replacing an item on the current market. The parties can therefore believe that the balance sheet of society is undervalued. Or the assets of the company no longer have to stand for the historical value specified in the balance sheet. Therefore, the balance sheet is overvalued.