What Is The Definition Of Historical Cost?

The original economic value of an item is known as the historical cost of the item. In most of the cases the historical cost is very different from the current cost like the value of the asset bought five years ago will be different in the current period, however in many cases historical cost may give the true value.

For example, a company buys an assets in year 1 for $100 and the asset is still possessed by the company at the end of the year 2, when its market value is $120. Although the value of the asset has increased but the value of asset on the balance sheet will be $100.