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Historical value, or the initial purchase price of an asset, can conflict with its current fair value or market price. It is important in accounting and finance, but market conditions can make it less relevant. Historical value can also have different meanings in collectibles and historical documentation.
The historical value of an item or property, also known as historical cost, is the initial purchase price of an asset. Over time, the value of an item can change based on market conditions, resulting in a conflict between an asset’s historical cost and its fair value, or market price. The historical value principle comes into play most often in the world of accounting and finance, where accurate reporting and financial information is paramount to the accuracy of financial statements, but can be used in other occupations as well.
When an item is purchased by a company or individual, the price is recorded. For corporations, this is recorded on the balance sheet. This allows for depreciation for tax purposes and provides an idea of an asset’s relative value. For many, the historical cost may not be relevant.
Market conditions can make an item more or less valuable over time. For example, a piece of land may be more attractive due to location and development opportunities than when it was first purchased. In this case, the historical cost would be less than the current market price. Historical cost must be taken into account when making a sale, but knowing the market price of the asset is necessary to make an informed sale or purchase. An asset can also lose value due to changes in market conditions.
One reason why some people, especially accountants, prefer to use the historical value is the reliability of the actual price. Upon purchase, the historical cost of the item is very tangible and accurate. The market price is less reliable. Based on individual judgment and opinions about an asset’s future utility or value, the market price can vary depending on the person making the purchase offer. This makes it difficult to use any number other than the historical cost for accounting or financial purposes.
The historical value of an item can also mean something different outside of the world of finance and accounting. For example, in the world of collectibles and historical documentation, the historical value of the item can far exceed the original cost or estimated value of an item. The value of an item related to history and other collectibles is also known as the archival value of an item. Collectors and historians use historical value to put a price on an item’s importance to a particular culture or historical event.
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