Carrying Amount: Definition, Calculation & Importance

The carrying amount is the original cost of an asset as reflected in a company’s books or balance sheetBalance SheetThe balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting., minus the accumulated depreciation of the asset. It is also called book value and is not necessarily the same as an asset’s fair valueFair ValueFair value refers to the actual value of an asset - a product, stock, or security - that is agreed upon by both the seller and the buyer. Fair value is applicable to a product that is sold or traded in the market where it belongs or under normal conditions - and not to one that is being liquidated. or market value.

Carrying Amount vs. Market Value

Carrying amount and market value differ in many ways, as listed below:

• Carrying amount is the value of an asset as it appears on the balance sheet and is acquired, after deducting its accumulated depreciation and impairment expenses. The market value of an asset, on the other hand, depends on supply and demandSupply and DemandThe laws of supply and demand are microeconomic concepts that state that in efficient markets, the quantity supplied of a good and quantity, where if the demand is high, its value increases, and if the demand is low, its value decreases.
• Carrying amount is based on the gradual depreciationDepreciation MethodsThe most common types of depreciation methods include straight-line, double declining balance, units of production, and sum of years digits. of the value of a certain asset, which means that its value will change and decline over time. Market value is the value given to an asset when it is being sold in the open market.

Example of Carrying Amount

Let’s say a company owns a tractor worth $80,000 to be used for developing its newest land property. The said tractor’s annual depreciation is $3,000 and is expected to still be of use for 20 years, at which time the salvage value is expected to be $20,000. The annual depreciation is therefore $3,000 ($80,000-20,000)/20 years. At the end of the 20 years, the tractors carrying amount is $20,000.

Example of Fair Value

Given the same tractor, its fair value will depend on the supply and demand in the market. If, at the time it was sold in the market, the demand for tractors is high, it can be priced higher than its carrying value. The opposite can also be true if the demand goes down. The price of the tractor can go up or down, depending on how much buyers are willing to give for it.

Carrying Value vs. Book Value

Many people use the terms carrying value and book value in different industries. But what they don’t know is that both terms are ultimately the same thing and are interchangeable. The term carrying value refers to the value of the asset that is carried over to the end of its life, whereas the term book value refers to the purchase cost of the asset that is recorded in the company’s book or balance sheet less accumulated depreciation.

How to Calculate for Carrying Amount

It is a very simple task to calculate for carrying amount, as shown in the example above. But to make it clearer, let’s explain it below:

• Take the original cost of purchasing the asset less salvage value.
• Divide that number by the number of years the asset is expected to be of use to generate the annual depreciation amount and record annually.
• Calculate the accumulated depreciation (number of years past * annual depreciation)
• Subtract the accumulated depreciation from the original purchase price to get the carrying amount.

Depreciation in the Carrying Amount

Depreciation is the lowering of the value of a tangible asset because of wear and tear. Tangible assets include buildings, equipment, furniture, and vehicles. One of the easiest and most commonly accepted methods of computing for depreciation is the straight-line depreciation methodStraight Line DepreciationStraight line depreciation is the most commonly used and easiest method for allocating depreciation of an asset. With the straight line. Using the straight-line method, the same depreciation value is copied for every year, such as what was done in the above example wherein if the depreciation value for the first year is $3,000, it would be the same value for the succeeding years.

The other method is the double-declining balance depreciation methodDouble Declining Balance DepreciationThe double declining balance depreciation method is a form of accelerated depreciation that doubles the regular depreciation approach. It is, otherwise known as the 200% declining balance method. With the DDB method, the depreciation is faster than that of straight-line but will not make the depreciation value bigger. It just means that depreciation is bigger in the early years but smaller in the later years.

Related Readings

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