What it is:
How it works (Example):
The formula for depreciated cost is:
Depreciated Cost = OriginalPrice - Accumulated
Assume Company XYZ bought a MegaWidget for $100,000 three years ago. The MegaWidget depreciates by $10,000 a year. Thus the depreciated cost of the MegaWidget is:
$100,000 - $10,000 (year 1 depreciation) - $10,000 (year 2 depreciation) - $10,000 (year 3 depreciation) = $70,000
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 a building with a resale value of $1 million may have fully depreciated the asset on its balance sheet, leaving it with a depreciated cost of zero. In this example, the book value of the asset -- and perhaps of the organization as a whole -- would therefore be understated.