Historical Cost Principle

The Historical Cost Principle is an accounting concept that states assets should be recorded at their original purchase price, not at their current market value. 
This rule applies even if the asset's market value has increased or decreased.
Because the market values fluctuate, using historical cost provides a stable and verifiable record of transactions, ensuring consistency and reliability in financial reporting.
Suppose Gamma Corporation buys a building for two million dollars. In that case, the corporation reports the purchase price on its balance sheet, even if the building's market value rises to three million dollars later.
This helps stakeholders understand the cost at which the asset was originally acquired, even though it may not reflect current worth.
However, the historical cost principle may not show the true value of assets when their prices rise significantly. 
Despite its drawbacks, the historical cost principle provides a clear and consistent method of recording assets, making it easier to track financial history and compare data over time.