What is Original Cost?
Original Cost refers to the total amount incurred by the present owner to acquire an asset. It includes necessary expenses like the purchase price, shipping, installation, and other initial costs associated with getting the asset up and running.
Importance of Original Cost
Understanding the Original Cost is crucial as it represents the baseline value on which depreciation calculations and financial assessments are based. Whether for tax purposes, sale or for accurate financial reporting, knowing the Original Cost helps organizations maintain precise records.
Original Cost vs Historic Cost
Though often used interchangeably, Original Cost focuses on the current owner’s expenditure, whereas Historic Cost can refer to the initial expenditure when the asset was originally acquired by its very first owner, irrespective of subsequent ownerships and periods of depreciation.
Practical Example: Machinery Purchase
Imagine a company, ABC Manufacturing, buys a piece of machinery for $50,000. The company spends an additional $5,000 for installation and testing. Thus, the Original Cost for ABC Manufacturing totals $55,000.
On the other hand, if XYZ Enterprises initially bought the same machinery three years ago for $45,000 and sold it to ABC Manufacturing, this initial price represents the Historic Cost for XYZ but means less in calculating the asset’s useful life and depreciation for ABC.
Frequently Asked Questions
Q: What expenses are included in the Original Cost of an asset? A: The Original Cost includes the purchase price, delivery charges, installation costs, and any initial setup fees necessary to make the asset operational.
Q: Why is the Original Cost important for accounting purposes? A: The Original Cost forms the basis for depreciation calculations and financial statements, providing an accurate measure of asset value.
Q: Can the Original Cost change over time? A: No, the Original Cost remains the same. Instead, financial adjustments over time are accounted for through depreciation or revaluation strategies.
Related Terms: Historic Cost, Fair Market Value, Depreciation.
