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Explain the historical cost concept as it applies to long-term operational assets. Why is the book...

Explain the historical cost concept as it applies to long-term operational assets. Why is the book value of an asset likely to be different from the current market value of the asset?
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Answer #1

The historical cost concept refers to the long-term operational assets to be recorded as the exact amount in which they are paid for. The amount will be reflected in the balance sheet as long as the asset is owned. Over time the value of asset can increase or decrease, however the variation is not recorded and is not shown on the accounts of the business.

Book value refers to the amount that the company's assets (net of depreciation, amortization, and depletion) and total liabilities as carried on the balance sheet of the company. It is also termed as the net asset value of a company computed as total assets minus intangible assets (such as goodwill, patents) and liabilities. The current market value is the price that equals selling of an asset on a competitive open market.

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