cost principle for assets
Imagine you buy a delivery van. The sticker price is 40,000, but to actually get it working you also pay 1,500 in sales tax, 800 to ship it, and 700 to paint your logo on the side and get it road-ready. How much did the van 'cost' you? Common sense says all of it — 43,000 — because every one of those payments was necessary to put the van to work. The cost principle for assets says exactly that: record the asset at everything you reasonably spent to get it ready for use.
Formally, the cost principle says a long-lived asset is recorded at its historical cost — the cash (or cash-equivalent) price paid to acquire it plus all reasonable and necessary costs to bring it to its location and condition for intended use. For equipment that means the purchase price plus taxes, freight, installation, and testing. For land it includes the price plus legal fees, surveying, and clearing. Costs that are not necessary to get the asset ready (like a parking ticket the driver got, or repairs after the asset is already in use) are expensed, not added to the asset.
This principle matters because it gives a single, objective, verifiable number — backed by an actual transaction and a receipt — rather than someone's opinion of what the asset is 'worth'. That objectivity is its great strength. Its great weakness is that, years later, the recorded cost can drift far from current market value: a building bought for 200,000 decades ago may be worth millions today, yet still sits near its original cost (less depreciation) on the books. So a balance sheet is a record of cost, not a price list of what the company could sell its assets for.
A factory buys a machine listed at 50,000, pays 3,000 freight to ship it, 4,000 to install and wire it, and 1,000 to test it before production. The machine is recorded at 50,000 + 3,000 + 4,000 + 1,000 = 58,000 — its full cost ready for use. A 600 repair bill the next year, however, is an expense, not part of the machine's cost.
Everything needed to get it running counts as cost; later running repairs do not.
Recording assets at cost is objective but means the balance sheet usually understates the current value of long-held land and buildings. 'Book value' is a cost figure, not a market appraisal.