What is Carrying Value
A carrying value is an accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance sheet. For physical assets, such as machinery or computer hardware, carrying cost is calculated as (original cost - accumulated depreciation). If a company purchases a patent or some other intellectual property item, the formula for carrying value is (original cost - amortization expense).
BREAKING DOWN Carrying Value
Accounting practice states that original cost is used to record assets on 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. At the initial acquisition of an asset, its carrying value is the original cost of its purchase. However, over time, an asset's value will change. Both depreciation and amortization expense are used to recognize the decline in value of an asset as the item is used over time to generate revenue.
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.