Original Cost
Original cost refers to the amount first paid to acquire an asset before any depreciation, amortization, or impairment charges. It includes not only the purchase price but also any other costs that are necessary to get the asset ready for use. These could be costs for delivery, installation, testing, legal fees, or any improvement made at the time of acquisition that extends the useful life of the asset beyond one year.
In accounting, the original cost is used as the basis for depreciation calculations for tangible assets like property, plant, and equipment or amortization for intangible assets like patents or trademarks.
For example, if a company buys a machine for $100,000, pays $5,000 for shipping and installation, and spends another $5,000 on testing and calibration, the original cost of the machine would be $110,000. This would be the amount recorded as an asset on the company’s balance sheet, and depreciation would be calculated based on this amount.
It’s important to note that the original cost does not consider changes in the asset’s market value over time. The asset’s book value, or carrying value, which is the original cost minus accumulated depreciation or amortization, may differ significantly from its current market value, especially as the asset gets older.
Example of Original Cost
Let’s consider a real-world scenario to illustrate the concept of original cost.
Let’s assume that SuperTech Inc., a tech company, decides to purchase a new server for its data center. Here’s how the costs break down:
- Purchase price of the server: $15,000
- Shipping costs: $500
- Installation and setup costs: $1,000
- Software needed to run the server: $3,500
Adding these costs together, we get:
$15,000 (purchase price) + $500 (shipping) + $1,000 (installation) + $3,500 (software) = $20,000
In this scenario, the original cost of the server would be $20,000. This is the amount that SuperTech Inc. would record as the cost of the server on its balance sheet. If the company uses straight-line depreciation and estimates the server will have a useful life of 5 years with no salvage value, it would depreciate ,000 (,000 divided by 5 years) of the server’s value each year.
Please note that different companies might handle certain costs differently depending on their accounting policies and applicable accounting standards. Always consult with a qualified accountant or financial advisor for specific advice.
