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ACC 281 Week 2 DQ 2 Explain the historical cost concept as it applies to long-term operational asset

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Accounting

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ACC 281 Week 2 DQ 2
Explain the historical cost concept as it applies to
long-term operational assets.
The historical cost concept refers to the long-term
operational assets be documented at the amount
in which they are paid for. This amount will show
on the balance sheet as long as the asset is
owned. In time, the asset may rise or even
decrease in value, but this variation is not reflected
on the accounts of the business. The historical
cost of assets can be reduced due to depreciation
over time. According to Edmonds (2010), “The

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historical cost concept requires that most assets
be reported at the amount paid for them (their
historical cost) regardless of increases in market
value” (pg. 13).
Why is the book value of an asset likely to be
different from the current market value of the
asset?
In order to understand why the book value of an
asset likely to be different from the current market
value of the asset, one must first understand the
terms. Palmiter, A. R. (2003), describes, “Book
value is simply the amount that the company's
assets (net of depreciation, depletion and
amortization) and total liabilities -- as carried on
the company's balance sheet. (Sometimes book
value is referred to as net book value, net worth or
shareholders' equity.) Taking the value of real
assets and subtracting any debt can determine the
book value. The current market value
Reference

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Palmiter, A. R. (2003). 5.1.1 - Book value. Wake
Forest Student, Faculty and Staff Web Pages.
Retrieved September 10, 2013, from
http://users.wfu.edu/palmitar/Law&Valuation/chapt
er%205/5-1-1.htm
Edmonds, Olds, McNair and Tsay. (2010). Survey
of Accounting. McGraw-Hill/Irwin. New York, NY.

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