The cost principle is a standard guideline used by accountants around the world and is part of the GAAP conceptual Framework.. It ensures that all the information being displayed on a company’s financial statements regarding the value of any asset, equity, or liability reflects the reality of the underlying transactions. Also, this practice reduces the possibilities of miss valuing a given asset, since the price used to record the transaction will be the actual price paid. As for equity and liabilities, transactions must be recorded on the date they were received at the original acquisition cost.
In a nutshell :
- 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.