What is a 'Carrying Value'
A carrying value is calculated in the balance sheet as (original cost – accumulated depreciation), and this formula applies to tangible, or physical, assets. If a company purchases a patent or some other intellectual property item, the formula for carrying value is original cost less amortization expense. Intangible assets must be reviewed for impairment, which is a permanent decline in the value of intangible assets, and the decrease in value must be expensed immediately.
BREAKING DOWN 'Carrying Value'There are several accounting practices that apply to carrying value, including the matching principle, which states that company revenue must be matched with the expenses incurred to produce the revenue. Both depreciation and amortization expense are used to recognize the decline in value of an asset as the item is used to generate revenue. Another accounting practice states that original cost is used to post assets to the balance sheet, rather than market value, because original cost can be traced to a purchase document, such as a receipt. Market value is more subjective.
How Depreciation Works
Assume ABC Plumbing buys a $23,000 truck to perform residential plumbing work, and the accounting department creates a new plumbing truck asset on the books with a value of $23,000. Because of the amount of mileage driven and other factors, 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 the $23,000 original cost minus the $3,000 salvage value, or $20,000. The annual depreciation is the $20,000 divided by five years, or $4,000 per year.
The Differences Between Carrying Values
The carrying value of the truck changes each year because additional depreciation is posted each year. At the end of year one, the truck’s carrying value is the $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. A financial statement reader can see the carrying amount of the truck is $15,000. Note that, while buildings depreciate, land is not a depreciable asset.
Factoring in Intangible Assets
Intellectual property assets are considered intangible assets, and intellectual property cannot be internally generated by a company and posted to the balance sheet. If a company performs research and is awarded a patent, for example, the cost to obtain the patent is expensed as incurred. Intangible assets are amortized over an estimate of useful life, and the asset’s original cost is presented in the balance sheet with an amortization account for each asset.