The Cost Principle

            

Source: https://www.slideshare.net/Surbakty/accounting-principles-434729    

            The cost principle (historical cost) is another basic guideline of accounting, it requires one to initially record an asset as its original acquisition cost. Acquisition cost is the cost that a company records after adjusting for discounts, incentives, closing costs and other expenses. Another way to put it is that the cost principle demands that assets be recorded at its cash amount when that asset is required.

            For example, if an asset is obtained at $50,000 that is the amount it would be recorded as. The asset would be useful for 10 years, meaning the depreciation expense would be $50,000/10 years which comes out to $5,000/year. The company’s balance sheet will document the assets historical cost minus the depreciation.

            Short-term assets and liabilities under the cost principle are more warranted than long-term assets and liabilities. Due to depreciation, with the cost principle, there is little to no room to increase the value of items over a long period of time.

By Katie Howard 

Citations:

Acquisition Cost

What is the cost principle?

The cost principle