Loading the player...

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.

RELATED TERMS
  1. Fully Depreciated Asset

    A fully depreciated asset is a property, plant or piece of equipment ...
  2. Amortization Of Intangibles

    A tax term relating to the practice of deducting the cost of ...
  3. Depreciated Cost

    Depreciated cost is the original cost of a fixed asset less accumulated ...
  4. Salvage Value

    The estimated value that an asset will realize upon its sale ...
  5. Straight Line Basis

    A method of computing amortization (depreciation) by dividing ...
  6. Business Asset

    A piece of property or equipment purchased exclusively or primarily ...
Related Articles
  1. Investing

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  2. Investing

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
  3. Financial Advisor

    How Does Depreciation Reduce My Tax Bill?

    How the depreciation tax rule can assist real estate investors.
  4. Managing Wealth

    Comparing Tangible and Intangible Assets

    Tangible assets are physical assets such as land, vehicles or equipment.
  5. Investing

    Goodwill vs Other Intangible Assets: What's the Difference?

    "Intangible" assets don't possess physical substance. Yet they are quanitfiable, and of great importance to any business.
  6. Taxes

    Filling out Form 4562, step-by-step

    Step-by-step, how to fill out the depreciation and amortization form for your business tax return.
  7. Taxes

    Recoverable Depreciation: How it Works

    Recoverable depreciation is a concept used in many insurance policies and claims.
  8. Investing

    Mark-To-Market: Tool Or Trouble?

    Mark-to-market accounting can be a valuable practice, but all bets are off when the market fluctuates wildly.
RELATED FAQS
  1. What is the difference between carrying value and market value?

    Understand the difference between carrying value and market value. Learn when a company uses carrying value to value an asset ... Read Answer >>
  2. What is the tax impact of calculating depreciation?

    Understand the tax implications of a company's depreciation. Learn how differences in accounting methods change the amount ... Read Answer >>
  3. What would cause a decrease in accumulated depreciation?

    Understand what causes a decrease in a company's accumulated depreciation. Learn why a company's accumulated depreciation ... Read Answer >>
  4. How does accumulated depreciation affect net income?

    Learn why accumulated depreciation does not directly affect a company's net income; understand where a company accounts for ... Read Answer >>
  5. What are the different ways to calculate depreciation?

    Read about some of the different allowable methods of calculating depreciation expenses as allowed by generally accepted ... Read Answer >>
  6. Can working capital be depreciated?

    Learn the difference between expensing and depreciation for current and long-term assets, and how working capital can be ... Read Answer >>
Hot Definitions
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  3. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  5. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  6. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
Trading Center