Is a system of accounting based on the principle that assets should be valued at historical cost or historical cost is the original monetary value of an economic item.

Historical cost is based on the stable measuring unit assumption. In some circumstances, assets and liabilities may be shown at their historical cost, as if there had been no change in value since the date of acquisition. The balance sheet value of the item may therefore differ from the "true" value.

It is relaxed to some extent by such practices as the valuation of stock at the lower of cost and net realizable value and, revaluation of fixed assets.

The advantages of historical-cost accounting are that it is relatively objective, easy to apply, difficult to falsely manipulate, and suitable for audit verification.

In times of high inflation, however, the results of historical-cost accounting can be misleading as profit can be overstated, assets understated in terms of current values, and capital maintenance is only concerned with the nominal amount of the capital invested rather than its purchasing power.

Because of these defects it is argued that historical-cost accounting is of little use for decision making, but attempts to replace it with such other methods as current-cost accounting have failed.

Company legislation sets out the rules for the application of historical-cost accounting to financial statements. Companies may also choose to use alternative accounting rules based on the modified historical-cost convention, in which certain assets are included at revalued amounts.

The problems that can be encountered when users rely on financial statements prepared under the historical cost conversion of their information need.

Financial statements prepared on the historical cost basis do not necessarily lead to a true and fair presentation of an entity’s performance or future potential if