2017-03-29 00:00:00 Bookkeeping English Understand the uses of historical costs, how to determine your historical costs, and what the difference is between historical costs and... https://d1bkf7psx818ah.cloudfront.net/wp-content/uploads/2017/06/08213915/Vinyl-Shopkeeper-Reviews-His-Inventory-And-Checks-Prices-Against-Their-Historical-Cost.jpg What is the Historical Cost?

What is the Historical Cost?

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Historical cost is the amount you spent when you originally bought an asset. It is usually the amount of money you paid to buy something, although it also includes the value of trade-ins related to the deal. If your company bought a piece of equipment eight years ago for $500, the equipment has a historical cost of $500. Your historical cost of a company car purchased for $10,000 and a trade-in of an old company car worth $2,000 would be $12,000. All of your assets are shown on your balance sheet as the historical cost for the item minus any accumulated depreciation you have recognized. It is important to distinguish historical cost to fair market value. FMV is the current value of an item. It is usually the current price of the asset, and your historical cost has no impact on the current FMV of the item. If you do not record depreciation, the gain or loss on an asset is the current FMV minus your historical cost. If you bought your office building for $60,000 and just sold the building at its FMV of $75,000, your capital gain is $15,000. You probably want to understand how this gain is calculated because the amount is taxable. Knowing the historical cost for items you plan on selling in the future lets you plan ahead for taxes. You want to keep a reliable record of all of the original prices you paid for the items your business owns. These historical costs play a part in your financial statements, and for calculating gains and determining how much tax you owe on asset sales.

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