Historical and Replacement Costs

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Historical cost refers to the cost of an asset acquired· in the past whereas replacement cost refers to the outlay, which has to be made for replacing an old asset. These concepts own their significance to unstable nature of price behaviour. Stable prices over a period of time, other things given, keep historical and replacement costs on par with each other. Instability in asset prices, however, makes the two costs differ from each other.

Historical cost of assets is used for accounting purposes, in the assessment of net worth of the firm.

 

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