Original cost is the original price paid for an asset or item when it was first purchased. It is used as the basis for calculating depreciation, capital gains tax and other financial metrics as it provides a baseline point of comparison.

The concept of original cost is typically used in accounting and is used to compare the asset’s market value at the time of purchase to its current condition. It is important to note that the original cost of an item is not necessarily equal to the fair market value of the item when purchased. For example, if an asset or item is purchased at a discounted rate or via a trade-in, the original cost for this item will be lower than its fair market value.

Original cost is also often used to calculate financial metrics such as depreciation, capital gains tax and other financial computations, as well as being necessary for maintaining historical records. Records of the original cost of an item can also be used when calculating net proceeds from the sale or disposal of a purchased asset.

In the accounting world, there are generally accepted rules and guidelines that must be followed when calculating original cost. When depreciation is the goal, the depreciation period should match the useful life of an item. For example, an asset with a five-year useful life will typically be depreciated over a five-year period beginning with its original cost.

Original cost is an important factor in accounting that can help business owners gauge and track the performance of their assets over time. It is important to keep accurate records of original cost as it provides business owners with an important piece of information when evaluating the current value of an item in the marketplace. The original cost of a purchased asset will also be part of the cost basis when calculating any net proceeds from a future sale. As a result, keeping accurate records of the original cost of a purchased asset is essential for any business owner.