Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Depreciated Cost

What it is:

Depreciated cost is the cost of an asset minus its accumulated depreciation. Another term for this concept is net book value.

The formula for depreciated cost is:

Depreciated Cost = Original Asset Price - Accumulated Depreciation

How it works (Example):

Let's assume Company XYZ purchased 10 trucks at the same time five years ago for a total cost of $250,000. The trucks have a 10-year useful life, so the fleet depreciates each year by $25,000 per year ($250,000 / 10). Because five years have gone by, the depreciated cost of the fleet is now:

$250,000 original cost - ($25,000 annual depreciation x 5 years) = $125,000

The depreciated cost, or net book value, of the truck fleet is $125,000.

Why it Matters:

Although depreciated cost is most simply stated as asset cost minus accumulated depreciation, it is by no means a precise measure of value. Accounting methods can assume that assets have a current value that may be unrealistic in the marketplace. For example, a company that owns commercial real estate with a resale value of $1 million may have fully depreciated the asset on the balance sheets to indicate a net value of zero. In this example the book value of the asset -- and perhaps of the organization as a whole -- would therefore be understated.