ong>Answer:

Understanding Historical Cost

The historical cost principle is a basic ACCOUNTING principle under U.S. GAAP. Under the historical cost principle, most assets are to be recorded on the balance SHEET at their historical cost even if they have significantly increased in value over time. Not all assets are held at historical cost. For example, marketable securities are recorded at their fair market value on the balance sheet, and impaired intangible assets are written down from historical cost to their fair market value.

Valuing assets at historical cost prevents overstating an asset's value when asset appreciation may be the RESULT of volatile market conditions. For example, if a company's main headquarters, including the land and building, was purchased for $100,000 in 1925, and its expected market value today is $20 million, the asset is still recorded on the balance sheet at $100,000.

Asset Depreciation

Furthermore, in accordance with accounting conservatism, asset depreciation must be recorded to account for wear and tear on long-lived assets. Fixed assets, such as buildings and machinery, will have depreciation recorded on a REGULAR basis over the asset's useful life. On the balance sheet, annual depreciation is accumulated over time and recorded below an asset's historical cost. The subtraction of accumulated depreciation from the historical cost results in a lower net asset value, ensuring no overstatement of an asset's true value.