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Most of the assets were bought a long

time ago and would worth much more
than the books show today.

What is the accounting principle?

1 Answer

7 votes

Answer:

Historical cost principle

Step-by-step explanation:

Assets must be recorded at cost value, not market value. When you record an asset, you cannot change its value every period, you have to keep using the historical value. This is why we use a separate account to record accumulated depreciation of assets, so that the purchase cost is always constant, but the net carrying value will vary depending on depreciation expense.

Market value changes and can be very volatile. Imagine a house, whose initial value was $300,000, then it increased to $500,000 but the market went down and its value was $350,000. It would be a mess to change the value and pay capital gains taxes, or then report a loss.

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