Carrying Value

What Is Carrying Value?

Carrying value is an accounting measure of value in which the value of an asset or company is based on the figures in the respective 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, then the formula for carrying value is (original cost - amortization expense).

How Carrying Value Works

Carrying amount, also known as carrying value, is the cost of an asset less 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 practice states that original cost is used to record assets on the balance sheet, rather than market value, because the 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, 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. 

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 of Carrying Value

Assume ABC Plumbing buys a $23,000 truck to assist in the performing of residential plumbing work, and the accounting department creates a new plumbing truck asset on the books with a value of $23,000. 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 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 carrying value of the truck changes each year because of the additional depreciation in value that is posted annually. 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.