Original Cost

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What is the original cost

The original cost is the total price associated with the purchase of an asset. The original cost of an asset takes into account all of the elements that can be attributed to its purchase and entry into service. These costs include the purchase price and factors such as commissions, transportation, appraisals, warranties, and installation and testing. The original cost can be used to assess a type of asset, including equipment, real estate and security instruments.

BREAKDOWN of original cost

The original cost includes all quantifiable facets of a purchased asset. For example, a business purchases equipment that costs $ 20,000. The purchase also involves $ 1,000 in fees, $ 700 in shipping and delivery, and $ 3,000 for installation and warranty. The initial cost of this piece of equipment would be $ 20,000 + $ 1,000 + $ 700 + $ 3,000 = $ 24,700. Also known as 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 the notes to the financial statements will separate property, plant and equipment at historical cost from the accumulated depreciation of these long-lived assets. The difference is known as book value.

Determining the original cost of an asset is important in calculating the tax base of the asset. The original cost of an asset is more than the purchase price of the asset, and the costs added together can reduce the potential taxable gain on the sale of the asset. The tax base can be calculated by taking the original cost and subtracting the accumulated depreciation from the asset. For the above equipment, assume that the accumulated depreciation is $ 14,700. The carrying value on the books of the corporation would be $ 10,000 (initial cost of $ 24,700 minus accumulated amortization of $ 14,700). If the company sells the assets for $ 15,000, it would record a gain on the sale of assets of $ 5,000.

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