Depreciated Cost

What Is Depreciated Cost?

Depreciated cost is the value of a fixed asset minus all of the accumulated depreciation that has been recorded against it. In a broader economic sense, the depreciated cost is the aggregate amount of capital that is "used up" in a given period, such as a fiscal year. The depreciated cost can be examined for trends in a company's capital spending and how aggressive their accounting methods are, seen through how accurately they calculate depreciation.

Depreciated cost is also known as the "salvage value," "net book value," or "adjusted cost basis."

How Depreciated Cost Works

The depreciated cost method of asset valuation is an accounting method used by businesses and individuals to determine the useful value of an asset. It's important to note that the depreciated cost is not the same as the market value. The market value is the price of an asset, based on supply and demand in the market.

The depreciated cost is the value of an asset after its useful life is complete, reduced over time through depreciation. The depreciated cost method always allows for accounting records to show an asset at its current value as the value of the asset is constantly reduced by calculating the depreciation cost. This also allows for measuring cash flows generated from the asset in relation to the value of the asset itself.

The Formula for Depreciated Cost

Depreciated Cost = Purchase Price (or Cost Basis) − CD where: CD = Cumulative Depreciation \begin{aligned} &\text{Depreciated Cost} = \text{Purchase Price (or Cost Basis)} - \text{CD} \\ &\textbf{where:} \\ &\text{CD} = \text{Cumulative Depreciation} \\ \end{aligned} Depreciated Cost=Purchase Price (or Cost Basis)−CDwhere:CD=Cumulative Depreciation

Example of Depreciated Cost

If a construction company can sell an inoperable crane for parts at a price of $5,000, that is the crane's depreciated cost or salvage value. If the same crane initially cost the company $50,000, then the total amount depreciated over its useful life is $45,000.

Suppose the crane has a useful life of 15 years. At this point, the company has all the information it needs to calculate each year's depreciation. The simplest method is the straight-line depreciation. This means that there is no curve to the amount of appreciation, whether that is an immediate 30% depreciation seen when driving new cars off the lot or an increased depreciation when an item is close to needing major repairs. Using this method, depreciation is the same every year. It equals total depreciation ($45,000) divided by the useful life (15 years), or $3,000 per year.