Original Cost: Definition, How It Works, and Example Calculation

What is original cost?

Original cost (also called historical cost or cost basis) is the total price paid to acquire an asset and put it into service. It includes the purchase price plus all directly attributable acquisition and preparation costs required to make the asset operational.

What original cost includes

Typical components added to the purchase price:
* Broker or sales commissions
* Transportation and delivery charges
* Installation, testing, and setup costs
* Appraisal and inspection fees
* Warranties or extended service directly tied to putting the asset to use
* Closing costs and title fees for real estate

Costs that improve or extend an asset’s useful life are capitalized and increase original cost. Routine repairs and maintenance are expensed and do not increase the original cost.

Example calculation

A company buys equipment with these costs:
* Purchase price: $20,000
Fees/commissions: $1,000
Shipping/delivery: $700
* Installation and warranty: $3,000

Original cost = $20,000 + $1,000 + $700 + $3,000 = $24,700

Original cost, depreciation, and tax basis

Original cost is the starting point for calculating depreciation and an asset’s tax basis.

Key relationships:
* Carrying value (book value) = Original cost − Accumulated depreciation
* Taxable gain on sale = Sale proceeds − Carrying value (if positive)

Using the example above, if accumulated depreciation is $14,700:
* Carrying value = $24,700 − $14,700 = $10,000
* If the company sells the equipment for $15,000, the taxable gain recorded = $15,000 − $10,000 = $5,000

How original cost differs from market value

Original cost reflects historical, objective amounts recorded when an asset was acquired. Market value is the current price at which the asset could be bought or sold. Financial statements typically present historical cost and recorded depreciation, not current market values (except where accounting standards require revaluation).

Why original cost matters

• Determines depreciation schedules and carrying value on the balance sheet.
• Establishes tax basis, which affects gain or loss calculations on disposal.
• Provides an auditable, objective record of what was paid to acquire and prepare an asset for use.

Key formula summary:
* Original cost = Purchase price + Direct acquisition and preparation costs
Carrying value = Original cost − Accumulated depreciation
Taxable gain/loss on sale = Sale proceeds − Carrying value