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