What is historical cost?
Historical cost, also referred to as cost or acquisition cost, refers to the original value (cost), at which an asset, liability, or equity investment, acquired by a business, is recorded in the business’s accounting system, and reported on its balance sheet. Historical cost is based on one of the most basic principles of accounting or bookkeeping, the historical cost principle also called the cost principle. The South African Revenue Service (SARS) describes the acquisition cost of a qualifying asset in its document, ‘Binding General Ruling (Income Tax) 7 (Issue 4)’ (issued on 9 February 2026), as follows: ‘The acquisition cost of a qualifying asset is deemed to be the cost which a person would if that person had acquired the qualifying asset under a cash transaction concluded at arm’s length on the date on which the transaction for the acquisition for that asset was in fact concluded, have incurred in respect of the direct cost of the acquisition of that asset, including the direct cost of its installation or erection.’ (Accentuations in the quotation are from the article writer.) SARS describes a qualifying asset as machinery, plant, implements, utensils, and articles qualifying for the wear-and-tear allowance also called the depreciation allowance. In summary, SARS allows that the acquisition cost of an asset consists of the following costs:
- The original buying price. The input tax with regard to the transaction is handled as follows:
- Excluded if the vendor is or was entitled to the input tax.
- Included if the vendor was not entitled to a deduction.
- Included if the taxpayer was not a registered vendor.
- Delivery (shipping) charges regarding the delivery of the asset.
- Installation or erection costs directly involved with the asset.
and interest are not allowed as part of the acquisition cost.
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Historical cost distinguished from other types of costs
There is a variety of other costs that can be assigned to assets, such as replacement cost, inflation-adjusted cost, and current cost.
- Replacement cost is the amount of money a business would pay to replace an existing asset with a similar asset of the same or higher value.
- Inflation-adjusted cost is the price of an asset that takes into account the effect of inflation. In other words, it is the historical cost of an asset adjusted cumulatively upwards since the date of acquisition to allow for inflation.
- Current cost is the cost, based on the prevailing costs for materials, labour, etc., that would be required to replace an asset in the current financial period.
Historical cost adjustments
Depreciation[1]
The accounting principle of prudence also called the principle of conservatism, requires that the accounting for a business should be fair and reasonable, including, that assets recorded at historical cost must be adjusted to allow for wear-and-tear (depreciation) through their usage as time passes. Put differently, for fixed and long-term assets, such as vehicles and plant and equipment, a depreciation expense is recorded, reducing their value over their estimated useful lives. Depreciation expenses are reported on the income statement. When a depreciation expense is recorded, the same amount is simultaneously recorded in the accumulated depreciation account, which is the total depreciation for a fixed asset since acquisition. Accumulated depreciation is an asset account with a credit balance, referred to as a contra asset account. On the balance sheet, accumulated depreciation is deducted from the historical cost total of the fixed assets. A schedule of write-off periods (commonly known as useful lives), acceptable to SARS, of various assets, is available in the SARS document, ‘Binding General Ruling (Income Tax) 7 (Issue 4)’, with the subject, ‘Wear-and-tear or depreciation allowance.’
Impairment
In addition to depreciation, if the value of an asset has been impaired, an impairment charge must be recorded to reduce the asset’s value to its net realisable value (the value that can be realised when the asset is sold, less the reasonable costs related to the sale or disposal of the asset). When the value of an impaired asset is reduced on the balance sheet, an impairment loss is recorded on the income statement. An impaired asset refers to an asset that has a balance sheet value that exceeds its market value. Typically, impairment of an asset occurs when a machine becomes obsolete. Examples of impaired assets are accounts receivable, long-term assets such as intangible assets (like goodwill), and fixed assets.
Fair market value (price)
Short-term assets, typically reported in the current asset section on the balance sheet, must be recorded at their fair market value (price) on the balance sheet. The fair market price is the current price, determined by the law of supply and demand, at which an asset can be bought or sold for a value that is fair to both the purchaser and the seller. Marketable investments, such as equity securities or debt securities, are examples of current assets that must be reported at their fair market value, indicating a more accurate value of what a company would receive if the securities were sold immediately.
Why is historical cost important?
There are various reasons to justify the importance of historical cost:
- Comparable: The fact that companies are required to use the historical cost principle, makes it easier to compare the cost of one asset with another. Historical cost enables management, shareholders, and other stakeholders to make informed decisions about assets.
- Verifiable: The historical cost of an asset can be verified by documents and records, confirming the amounts reported on the balance sheet.
- Reliable: Historical cost is in line with the accounting principle of conservatism, preventing the overstating of an asset. In addition, the process of indicating historical costs on a business’s balance sheet is always unchanged, allowing anyone analysing a balance sheet to get a reliable picture of the assets of the company.
The disadvantage of historical cost
Historical cost does not take the time value of money or the relevance of inflation into consideration. [1] See the article, ‘Depreciation in Accounting Explained for Dummies’, for more information about depreciation.
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