What is historical cost?
Under the historical cost principle, an asset is recorded at the amount of cash (or fair value of other consideration) paid when it was acquired. That figure generally stays as the starting point, reduced over time by [depreciation](/glossary/depreciation), amortization or [impairment](/glossary/impairment).
Example
A business bought land in 2010 for $100,000. In 2026 similar land sells for $350,000. Under historical cost the land remains on the balance sheet at $100,000.
Advantages
- Objective and verifiable: backed by invoices and contracts.
- Consistent: not affected by market swings.
- Simple: no need for regular valuations.
Disadvantages
- Can understate the value of long-held assets, such as property.
- Ignores inflation, which can distort comparisons in high-inflation economies.
- Less relevant to investors who want current values.
Historical cost vs fair value
Most frameworks use a mix. Property, plant and equipment is usually at cost (though IFRS allows revaluation), while many financial instruments are at [fair value](/glossary/fair-value).