Listen to a Business English Dialogue About Historical cost
Emma: Hi Philip, do you know what historical cost means in finance?
Philip: Yes, Emma. It’s the original cost of an asset when it was acquired, recorded in the company’s books.
Emma: Right. So, it’s the amount of money paid for an asset at the time of purchase?
Philip: Exactly. It’s used as the basis for accounting for the asset’s value on the balance sheet, regardless of any changes in market value over time.
Emma: How does historical cost differ from fair market value?
Philip: Well, Emma, fair market value is the current price an asset would sell for in the open market, while historical cost is the price paid when the asset was originally acquired.
Emma: So, historical cost doesn’t account for changes in the market value of an asset?
Philip: That’s correct, Emma. Historical cost remains constant on the balance sheet until the asset is disposed of, regardless of any fluctuations in market value.
Emma: Are there any advantages to using historical cost?
Philip: Yes, Emma. Historical cost is simple and easy to understand, and it provides a reliable basis for financial reporting and analysis.
Emma: What about disadvantages?
Philip: Well, Emma, one disadvantage is that historical cost may not accurately reflect the current value of an asset, especially if there have been significant changes in market conditions since the asset was acquired.
Emma: Thanks for explaining, Philip. I have a better understanding of what historical cost means now.
Philip: No problem, Emma. If you have any more questions about finance or business, feel free to ask anytime.