Historical Cost and Replacement Cost

The historical cost of an asset refers to the actual cost incurred at the time of the purchase of an asset. Replacement cost means the price to be paid to purchase an asset today. Suppose, the price of a PC in 1980 was Rs 30,000 and the present cost is Rs 50,000. The original cost of Rs 30,000 is the historical cost and Rs 50,000 is the replacement cost. The balance sheets show assets at their historical costs. But due to variation in prices over time replacement costs are relevant for managerial decisions.

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