Historical Cost Principle and Our Favorite Superheroes

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Some super rare comic books are extremely valuable today and are only appreciating in value. For example, one copy of Action Comics #1 was recently auctioned for $2.16 million. But if you happened to buy that comic in 1938, you wouldn’t record the appreciation each year until you sold it off. That’s because of the historical cost principle, an accounting method that only takes an item’s original cost into account.

When it comes to the historical cost principe, this method might be distorting your company’s balance sheet. Let’s say that a mint-condition Action Comics #1 is part of your store’s inventory. It’s been in your family for decades, since your grandfather bought it for $.10 and added it to the inventory of your family business. According to the historical cost principle, you would still mark down the value of this comic book in your balance sheet as, you guessed it, $.10. As a system that is concerned with consistent, comparable figures and past events, accounting requires the use of the historical cost principle.

The reason that the historical cost principle is important, even though it might cause big discrepancies in recorded value and actual value, is because market value is mercurial by nature. The market value of a comic book, car, or an entire business can change in seconds. So in order with historical cost accounting, assets and liabilities will continue to be recorded at their historical cost, regardless of the incredible and growing worth of Action Comics #1.

However, when you finally find the right buyer for your valuable comic, the historical cost principle will concede to the revenue recognition principle. This principle states that when a revenue is earned, it is recorded. So even though your family business has been recording Action Comics #1 at $.10 for the last 70 years, you will finally acknowledge and record the significant appreciation.

This scenario demonstrates why it is important for every business owner to become familiar with accounting principles like historical cost. Staying in accordance with accepted standards is the only way to do business.