Key Takeaways
- Carrying value is the original cost of a company’s asset minus accumulated depreciation or amortization.
- Unlike market value, which is subjective, carrying value is based on objective purchase records.
- Depreciation and amortization reflect asset value decline as they generate income over time.
- Land typically does not depreciate because it is considered to have an indefinite useful life.
- Example: A truck purchased for $23,000 with a $3,000 salvage value depreciates by $4,000 annually.
What Is Carrying Value?
Carrying value is an accounting measure that shows the value of an asset as recorded on a company’s balance sheet. For physical assets like equipment, it reflects the purchase price minus depreciation, while for intellectual property, it accounts for amortization. Carrying value often differs from market value because it doesn’t always reflect current market conditions. Carrying value changes over time as assets depreciate or are amortized, helping companies track the adjusted worth of their resources.
Investopedia / Julie Bang
Understanding the Mechanics of Carrying Value
The carrying amount, or carrying value, is an asset’s cost minus accumulated depreciation. The carrying amount is usually not included on the balance sheet, as it must be calculated. However, the carrying amount is generally always lower than the current market value.
Accounting rules use the original cost to record assets on the balance sheet because it can be traced to purchase documents. Market value is more subjective. At the initial acquisition of an asset, the carrying value of that asset is the original cost of its purchase. However, over time, the value of an asset will change.
Both depreciation and amortization expenses are used to recognize the decline in value of an asset as the item is used over time to generate revenue. Note that, while buildings depreciate, the land is not a depreciable asset. This is due to the fact that land is often considered to have an unlimited useful life, meaning that the value of the land will not depreciate over time.
Important
Although land is considered non-depreciable, factors such as improvements made to the land—as well as buildings and equipment present on the land—means that the overall carrying value of land can still depreciate.
Example: Calculating Carrying Value
Assume ABC Plumbing buys a $23,000 truck for residential plumbing, creating a new asset entry at the same value. Due to factors such as the total mileage and service history, the truck is assigned a useful life of five years. Salvage value is the remaining value of the asset at the end of its useful life.
ABC decides to depreciate the asset on a straight-line basis with a $3,000 salvage value. The depreciable base is $20,000 ($23,000 original cost minus $3,000 salvage value). The annual depreciation is the $20,000 divided by five years, or $4,000 per year.
The truck’s carrying value decreases each year due to annual depreciation. At the end of year one, the truck’s carrying value is $23,000 minus the $4,000 accumulated depreciation, or $19,000, and the carrying value at the end of year two is ($23,000 – $8,000), or $15,000.
In the fixed asset section of the balance sheet, each tangible asset is paired with an accumulated depreciation account. At the end of year two, the balance sheet lists a truck at $23,000 and an accumulated depreciation-truck account with a balance of -$8,000. Readers can see the truck’s carrying amount is $15,000.
The Bottom Line
Carrying value is an accounting measure from the balance sheet that shows an asset’s recorded value, helping assess its worth over time. Unlike market value, carrying value is often lower because it accounts for depreciation or amortization. Understanding carrying value is important for analyzing financial statements and managing assets effectively, as it reflects how asset values change over time. Concepts like depreciation and amortization are key to these calculations. For example, ABC Plumbing’s truck illustrates how carrying value is determined by subtracting accumulated depreciation from the original purchase price, showing a practical real-world application.
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