The historical cost principle states that businesses must record and account for most assets and liabilities at their purchase or acquisition price. In other words, businesses have to record an asset on their balance sheet for the amount paid for the asset. The asset cost or price is then never adjusted for changes in the market or economy and changes due to inflation.
The historical cost principle is a trade off between reliability and usefulness. The historical cost of an asset is completely reliable. After all, that’s how much the company paid for the asset. It might not be very useful however. Knowing that a company purchased a piece of land in 1950 for $10,000 does not really tell financial statement users how much the land is currently worth.