Explain why the historical cost principle is used to account for long-lived assets and how the cost basis is determined. Discuss - Essay Example

Only on StudentShare

Extract of sample
Explain why the historical cost principle is used to account for long-lived assets and how the cost basis is determined. Discuss

The GAAP mainly relies on consistency of data conveyed by business financial records. Since historical methods does not depend on the speculated market prices, rather a real transaction that occurred, the cost is regarded as most reliable. For this reason, the historical cost principle is best used for reporting long-lived assets. It is the best method for reporting assets whose disposal may not be done in the near future. Examples of these assets include land, buildings, fixture, equipment and natural resources such as mineral deposits, oil wells and timber tracks. Under the historical cost principle, assets are recorded at acquisition cost as indicated on the balance sheet. In accounting for purchases of long-term assets, interest expense is subtracted from the original cost or cost of acquisition. The book value of long-term assets can be calculated by getting the accumulated depreciation subtracted from acquisition cost. To estimate an asset’s useful life, important variables such as acquisition cost, depreciation expense per year and salvage value should be determined. The following methods are used to estimate asset’s useful life; straight-line depreciation method, production method and double (declining) methods. ...
Download paper

Summary

Historical cost principle, asset impairment and depreciation Name Institution How historical cost principle is used to account for long-lived assets Historical cost principle values assets at the original cost of acquisition. The concept takes into consideration the purchasing cost of an asset…
Author : urippin

Related Essays

Tesco: Evaluating The Cost Of Two Compressors That Will Be Used In The Refrigerator
Meanwhile, the paper evaluates cost of equity that is used to keep a share price that is essential to investors to evaluate the performance of various projects. On the basis of the various evaluation of the project, we recommend the way forward for the Tesco works. …
6 pages (1506 words) Case Study
IFRS 3 Business Combinations and IAS 38 Intangible Assets govern how companies should account for and disclose their goodwill an
For instance, all payments made to acquire a business must be recorded at fair value at the date of acquisition. And the contingent payments need to be classified as ‘debt’ which is measured sequentially through the income statement. All costs pertaining to acquisitions are expensed. IAS 38 This standard prescribes accounting policies for treating intangible assets that are not supervised in particular by any other standard. A firm can only recognize an intangible asset if it meets some specific standard requirements. This standard also guides in measuring the amount at which to report the…
4 pages (1004 words) Coursework
Cost allocation
The intention of this study is cost allocation as is evident from the fact that various firms use several methods of cost allocation. A cost allocation method should meet the specific criteria of the organization so that the ineligible items needed in cost appropriation can be removed and more appropriate items can be included. A systematic and rational cost allocation method should be adopted in the organization. It has to be determined in the beginning as to which divisions in the hospital can be differentiated as service centers or revenue centers and it should be decided how the service…
3 pages (753 words) Essay
USA Cost Accounting
Though Obama promised change, Government spending has continued unabated and even the risk of default on debt obligations in the beginning of August 2010 did nothing to dampen the Government’s appetite for spending. Although there was an impasse between those who supported Obama and those who didn’t, in the end common sense meant that the debt ceiling had to be increased for America to avoid default. Notwithstanding the exhortations of the public to stop Government spending, to tighten the belts and purses of the Government agencies and politicians and to stop the war on terror that has…
4 pages (1004 words) Essay
Cost Accounting
Among the various costing methods, absorption costing and marginal costing are the two important tools that are widely used for managerial decision making. This piece of research paper describes the differences between these two methods and explains the arguments for and against these costing methods. Marginal Costing As Lucey and Lucey (2002, p. 296) defined, marginal costing is an accounting system in which variable costs are charged to some specific cost units for a period of time and fixed costs are fully written off against the total contribution, which is the value of sales less variable…
5 pages (1255 words) Research Paper
account principle
b) It is a tool to control the activities of different subunits within the organisation. c) Budget exercise is used as a tool for forecasting and it can be used to motivate employees towards the set goals. Budgetary activity facilitates the planning process of the firm in a systematised manner keeping in view the organizational goals. Budget not only helps allocate resources and set the direction of the firm but also helps determine priorities to act in a manner that can bring results. Since budget sets targets in numbers, monitoring becomes easy and effective; it helps guide and coordinate…
6 pages (1506 words) Essay
The cons and pros of fair value versus historical cost accounting and deprival value
Financial reporting requires extremely accurate form of measurement to deliver information to lenders and shareholders who are obliged to know how wisely their money is being spent (Barth 2007). Van Zijl & Whittington (2006) reveal that the current form of measurement is increasingly emphasizing on the use of current value to replace historical costs. The principle reason behind the establishment of accounting standards was to ensure that financial information produced by organizations are accurate, reliable, complete, timely and relevant. In addition, accounting standards would ensure that…
6 pages (1506 words) Essay
Got a tricky question? Receive an answer from students like you! Try us!