What Is Original Cost?
Let me explain what original cost means. It's the total price you pay when you buy an asset, including everything that goes into getting it and making it ready to use. This covers the purchase price itself, plus things like commissions, transportation costs, appraisals, warranties, and even installation and testing. You can apply original cost to value different types of assets, such as equipment, real estate, or security instruments.
Original cost is also what we call an asset's cost basis when it comes to taxes.
Understanding Original Cost
When you look at original cost, it includes every quantifiable part of buying an asset. Take this example: suppose a company buys a piece of equipment priced at $20,000. Add in $1,000 for fees, $700 for shipping and delivery, and $3,000 for installation and warranty. That adds up to an original cost of $20,000 + $1,000 + $700 + $3,000 = $24,700. We also refer to this as historical cost, a standard term in generally accepted accounting principles (GAAP), and it's what gets recorded on the balance sheet.
On the balance sheet and in the notes to financial statements, you'll see historical cost separated for property, plant, and equipment (PP&E), along with accumulated depreciation for these long-term assets. The difference between them is the carrying value.
Original Cost and Depreciation
You need to determine an asset's original cost because it's key for calculating its tax basis. Original cost goes beyond just the purchase price, and adding up all those costs can lower the potential taxable gain if you sell the asset. To find the tax basis, take the original cost and subtract the accumulated depreciation.
Using the equipment example from before, if accumulated depreciation is $14,700, the carrying value on the books would be $10,000 ($24,700 original cost minus $14,700 accumulated depreciation). If the company sells it for $15,000, that results in a gain of $5,000 on the sale.
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