Historical cost principle
In one sentenceThe principle that an asset is recorded at its actual cost on the day it is acquired, and that cost remains the basis for measuring it later even if its market price changes.
Simply put
Cost is a firm figure backed by a document: the purchase invoice. Market value is an estimate that changes every day, so the books start from cost.
International standards allow other models for some assets, such as revaluation, but cost is the most widely used basis in small and medium-sized businesses.
Worked example
A business bought land for its warehouse for 1,000,000 SAR, and three years later its market value was estimated at 1,400,000 SAR.
Purchase cost1,000,000 SAR
Estimated market value today1,400,000 SAR
Value of the land in the books under the cost model1,000,000 SAR
Don't confuse it with
Fair valueThe price at which an asset could be sold today in an orderly market; it is used in cases specified by the standards.