Question

Suppose you are considering the purchase of a building. The seller is asking $270 comma 000270,000 for a building that cost her $135 comma 000135,000. An appraisal shows the building has a value of $240 comma 000240,000. You first offer $225 comma 000225,000. The seller counter offers with $255 comma 000255,000. Finally, you and the seller agree on a price of $250 comma 000250,000. What dollar amount for this building is reported on your financial statements? Which accounting assumption or principle guides your answer?

Answer 1

Since the building has been aquired for $250,000, hence it will be recorded in the books of accounts at $250,000. Historical cost is the cost at which an asset is purchased. The guiding principle here is Historical cost principle.

The Historical Cost Principle requires that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation, installation and cost of making the asset ready to use. The concept of cost is historical in nature as it is something which has been paid on the date of acquisition and does not change year after year. Adoption of historical cost brings in objectivity in recording as the cost of acquisition is easily verifiable from the purchase documents.