Historical cost accounting

Historical cost accounting is like keeping track of how much you paid for something when you got it. Let's say you bought a toy car for $5. That's the historical cost of the toy car. You can use that information to figure out how much money you made or lost when you sell the toy car later.

But sometimes, things get more complicated. Let's say you bought the toy car a long time ago, and now it's worth $10. If you sell it for $10, you make a profit of $5 ($10 selling price - $5 historical cost). But if you sell it for $6, you're not making as much profit as you would hope because you're selling it for less than what it's worth now.

This is why many people argue that historical cost accounting isn't perfect. The value of things can change over time, and sometimes the historical cost doesn't accurately reflect the true worth of something. However, historical cost accounting is still widely used in many industries because it's easy to calculate and provides a starting point for understanding financial information.