What is the concept of "Historical Cost" in accounting?

The concept of "Historical Cost" in accounting refers to the actual amount paid for an asset at the time of purchase, which includes the original cost plus any additional costs necessary to prepare the asset for use, like installation or transportation fees. This accounting principle ensures that assets are recorded in financial statements at their original cost, providing reliability and objectivity, since it is based on actual transactions rather than estimates or predictions.

This approach contrasts with other valuation methods, as it does not consider changes in market value over time, which is why the alternative choices do not align with the definition of Historical Cost. For example, estimating the future value of an asset relates to potential appreciation or inflation, whereas the historical cost focuses solely on the transaction that occurred. Similarly, the fair market value of an asset reflects its current valuation in the market, differing from what was originally paid. Finally, the depreciated value pertains to the allocation of an asset's cost over its useful life, rather than the cost itself at the time of acquisition.