Original Cost

Business Corporate Finance and Accounting

What Is Original Cost?

Original cost is the total price associated with the purchase of an asset. The original cost of an asset thinks about the things that can be all ascribed to its purchase and to putting the asset to utilize. These costs incorporate the purchase price and such factors as commissions, transportation, appraisals, guarantees and establishment and testing. Original cost can be utilized to value an asset type, including equipment, real estate and security instruments.

Original cost is otherwise called an asset's cost basis for tax purposes.

Grasping Original Cost

Original cost incorporates all quantifiable features of a purchased asset. For instance, a company purchases of a piece of equipment with a price tag of $20,000. The purchase likewise includes $1,000 in fees, $700 in transportation and delivery costs, and $3,000 for establishment and warranty. The original cost of this piece of equipment would be $20,000 + $1,000 + $700 + $3,000 = $24,700. Otherwise called historical cost, a common term in generally accepted accounting principles (GAAP), this is the original cost recorded on the balance sheet. The balance sheet and notes to financial statements will separate historical cost property, plant and equipment (PP&E) and accumulated depreciation of these long-term assets. The difference is known as carrying value.

Original Cost and Depreciation

Determining an asset's original cost is important in ascertaining the asset's tax basis. The original cost of an asset envelops more than the asset's purchase price, and the costs added together can reduce the potential taxable gain on the sale of the asset. The tax basis can be calculated by taking the original cost and deducting the accumulated depreciation of the asset.

For the piece of equipment above, assume accumulated depreciation is $14,700. The carrying value on the company's books would be $10,000 ($24,700 original cost less $14,700 accumulated depreciation). On the off chance that the company sells the asset for $15,000, it would record a gain on asset sale of $5,000.