Final answer:
The 'historical cost' principle requires that assets and liabilities be recorded at their original measurable value at the time of transactions occurred.
Step-by-step explanation:
The historical cost principle requires that assets and liabilities be recorded at the amounts that were measurable at the time transactions occurred. In accounting, this principle advocates recording the price of an asset on the balance sheet at its original cost when it was purchased. Similarly, liabilities should be recorded at the exchange value when they were incurred. This principle is key to understanding how financial statements provide a historical record of transactions.
A T-account, often used in accounting, represents a general ledger account and helps visualize the effects of transactions on individual accounts. A T-account features a two-column format, creating a T-shape, with one side representing assets and the other side representing liabilities. The balance sheet subsequently consolidates these accounts into a snapshot of a company's financial position at a specific point in time.
Understanding the historical cost principle enables better comprehension of other financial concepts such as a time deposit, which is a savings account or certificate of deposit that holds a fixed amount of money for a set period, or the notion of transaction costs, which are expenses incurred when buying or selling goods and services. In addition, the principle relates to the unit of account, a critical standard for measuring and comparing the value of different financial items within an economy.