Certified Fraud Examiner Practice 2025 - Free Practice Questions and Study Guide

Under U.S. Generally Accepted Accounting Principles (GAAP), the proper method for recording assets is based on their initial acquisition cost. This concept is known as the historical cost principle, which states that an asset should be recorded on the balance sheet at the original purchase price, including any costs directly attributable to bringing the asset to a usable condition.

This approach ensures consistency and reliability in financial reporting. Using initial acquisition cost provides a clear and verifiable basis for asset valuation that can be objectively measured at the time of acquisition. It reflects the actual transaction that occurred, making it less prone to subjective estimates or fluctuations in market conditions, which can occur with other valuation methods.

While other methods, such as fair value or market value, are occasionally used for specific assets and in certain circumstances under different accounting standards (like International Financial Reporting Standards), initial acquisition cost remains the foundational basis for recording most assets under U.S. GAAP. Replacement cost reflects what it would cost to replace an asset in its current condition, which does not align with the objective of the historical cost principle.