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According to the Cost Concept, an asset is recorded in the books of account at the price paid to acquire it and the cost is the basis for all subsequent accounting of the asset.
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Since the acquisition cost relates to the past, it is referred to as Historical Cost.
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However, the cost concept does not mean that assets will continuously be shown at their acquisition price for as long as the business entity owns them.
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Their cost is systematically reduced from year to year.
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This systematic reduction is done over the useful life of the asset.
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Useful life means the number of years (accounting periods) during which that asset is expected to be used.
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The process of systematic reduction of the cost of an asset over its useful life is known as Depreciation.
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For example, a computer is purchased for Rs 50,000 on 01.04.2017 and is expected to be used for 5 years. Now, at the time of purchase, i.e. on 01.04.2017, the computer will be recorded in the books of accounts at Rs 50,000. Since the useful life is 5 years, Rs 10,000 will be deducted from the cost of Rs 50,000 every year, so that, after 5 years, the value of the computer becomes NIL. Therefore, on 31.03.2018, Rs 10,000 will be deducted from Rs 50,000 and the computer will now be shown in the Financial Statements at Rs 40,000. Similarly, on 31.03.2019, another Rs 10,000 will be deducted from Rs 40,000 and now the computer will be shown in the Financial Statements at Rs 30,000.
