Historical Cost: Definition, Principle, and How It Works

cost principle definition

(2) Gasoline taxes, motor vehicle fees, and other taxes that are in effect user fees for benefits provided to the Federal Government are allowable. (1) Taxes that a governmental unit is legally required to pay are allowable, except for self-assessed taxes that disproportionately affect Federal programs or changes in tax policies that disproportionately affect Federal programs. (1) The costs of transportation of the employee, members of his or her immediate family and his household, and personal effects to the new location. (3) The reimbursement does not exceed the employee’s actual (or reasonably estimated) expenses. (2) Reimbursement to the employee is in accordance with an established written policy consistently followed by the employer.

(b) Costs of bonding required pursuant to the terms and conditions of the Federal award are allowable. Costs incurred by IHEs for, or in support of, alumni/ae activities are unallowable. (c) The costs are not otherwise borne directly or indirectly by the Federal Government.

Marginal costing

For this purpose, inflows consist of Federal reimbursement for depreciation, amortization of capitalized construction interest, and annual interest cost. Outflows consist of initial equity contributions, debt principal payments (less the pro-rata share attributable to the cost of land), and interest payments. (4) Accounting records, actuarial studies, and cost allocations (or billings) must recognize any significant differences due to types of insured risk and losses generated by the various insured activities or agencies of the non-Federal entity. If individual departments or agencies of the non-Federal entity experience significantly different levels of claims for a particular risk, those differences are to be recognized by the use of separate allocations or other techniques resulting in an equitable allocation.

cost principle definition

But for many capitalized assets, like real estate or heavy equipment, the opposite is often true. With values changing all the time, companies that purchased real property even five years ago could almost certainly get more for that property now. Yet cost accounting requires that they continue to value that asset at the price they paid for it, less any depreciation.

Exceptions to the cost principle

Maybe the manufacturer stopped making that particular item, or the item has become scarce. Even if you’re an accounting newbie, you know the importance of assets. Because they are so important to your business, it’s essential to record and report their value accurately and consistently, a relatively easy process if you’re using accounting software. Rather than changing entries in accounting records to reflect the new market value, the difference in price should be credited to an equity account called ‘revaluation surplus’. The cost principle is an accounting principle that requires assets, liabilities, and equity investments to be recorded on financial records at their original cost.

cost principle definition

(2) The charges are levied impartially on all items published by the journal, whether or not under a Federal award. (3) The past pattern of such costs, particularly in the years prior to Federal awards. (b) Costs of the non-Federal entity’s subscriptions to business, professional, and technical periodicals are allowable. (a) Costs incurred for materials, supplies, and fabricated parts necessary to carry out a Federal award are allowable. (8) Interest attributable to a fully depreciated asset is unallowable. (3) The non-Federal entity obtains the financing via an arm’s-length transaction (that is, a transaction with an unrelated third party); or claims reimbursement of actual interest cost at a rate available via such a transaction.

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Applying the cost principle maintains consistent and conservative values of your business’s assets. Unlike fair market value, which is often subjective and dependent on the market, the original purchase price of an asset remains fixed over time. By applying the cost principle, you can keep your balance sheet consistent between periods and won’t need to update your financial statements with current fair market values. (2) Capital expenditures for special purpose equipment are allowable as direct costs, provided that items with a unit cost of $5,000 or more have the prior written approval of the Federal awarding agency or pass-through entity.

It makes asset values objective, and it is easier to report on than other methods. Yes, when using the cost principle, depreciation of an asset still needs to be recorded. Using the cost principle will still record the original cost of the asset. When using the cost principle, an asset’s value is easy to determine.

The cost principle, appreciation, and depreciation

However, because the copyright is an intangible asset, it is not recorded on the balance sheet whatsoever. Because asset values change constantly, using the cost principle can lack accuracy. When you don’t take those fluctuations into account, a business’s financial position is difficult to assess. A business using the cost principle may have far less worth thanks to depreciated machinery. It may be worth far more, too, if assets have risen in value significantly.

Also, the cost of recording and updating asset values on a regular basis is time-consuming and expensive. Furthermore, the sources that are available for determining present values are diffused, which makes updating them challenging. It is worthwhile to ask why the cost concept of accounting is still adopted, especially given that it appears to be inconsistent with the relevance convention (i.e., because present values are relevant to most end-users). For example, suppose that a piece of land is acquired by a business at a specific price and, accordingly, is recorded as an asset in the books at that cost.

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