1.3.2 Historical Cost

Measurement attribute is the basis of determining the amount of accounting elements. According to the Accounting Standards for Business Enterprises in China，there are typically five measurement attributes, which are historical cost, current cost, current market value, net realizable value, and present value.

Historical cost means to record accounting elements based on the cost when economic business occurs.According to this requirement, assets, costs, and expenses should be recorded in accordance with the actual cash or cash equivalents paid to acquire assets, or with the fair value of assets paid to acquire another asset;and liabilities are measured according to the actual expenditure when obtain and repay it.

Compared to other measurement attributes, historical cost is objective and determinable, so it is widely used in practice. Nevertheless, when it becomes apparent that the historical cost cannot be recovered, a deviation from historical cost is accepted. This deviation is justified by the conservatism concept. A deviation from historical cost is also found in practice where specific standards stipulate other measurement attributes such as current cost, current market value, net realizable value, and present value.

We have mentioned the concept of conservatism in the above. According to the concept of conservatism,when accountants are faced with a choice of different measurements of a situation, they must choose the measurement with the least favorable effect on net income and financial position in the current period.

Significantly, an accountant cannot use the conservatism concept to justify arbitrarily low figures. To apply the concept of conservatism to any given situation, there must be alternative measurements and each measurement is reasonable and allowed by rules. For example, the accountant cannot write inventory down to an arbitrarily low figure to make earning management, because it cannot be justified under the concept of conservatism. Only making choice at the lower of historical cost or market value can be acceptable under the concept of conservatism.