![]() ![]() GAAP allows the readers of the financial statements to review meaningful and comparable information. Although the cost principle is not always relevant to the current market value of assets or liabilities, it is useful to managers, investors and bankers to make important decisions. Inventory is recorded at the lower of cost or net realizable value, which is the market selling price less any costs to sell the goods. ![]() ![]() Inventory may also be written down as the value of the original item may have decreased over time. However, since marketable securities fluctuate significantly over time, it may be a better option to leave the carrying value at its historical cost.Ĭapital assets are required to be written down if circumstances change and their value drops below their carrying value. The historical cost may be replaced with the current market value on the Balance Sheet. One exception to this rule is an asset such as marketable security that is publicly traded. The exchange-price (or cost) principle requires an accountant to record transfers of resources at prices agreed on by the parties to the exchange at the time of. As a result, an asset amount recorded at historical cost does not reflect the amount of money a company would receive if it were to sell the asset. Land as an example is not a depreciable asset and it usually appreciates over time. As the fair market value of assets can change significantly over time, the historical cost always remains the same and is the value recorded on the financial statements. The company’s Balance Sheet will report the historical cost of equipment less the accumulated depreciation. If the equipment will be useful over 5 years with no salvage value, it will be depreciated at a rate of $10,000 per year for 5 years. For example, if a corporation buys equipment for $50,000, it will be recorded at $50,000. Assets are recorded at their original purchase price known as historical cost. GAAP is basically the rule book that accountants follow for preparing financial statements. The cost principle is one of the Generally Accepted Accounting Principles (GAAP). ![]()
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