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 book value of an asset minus its accumulated depreciation

How it works (Example):

Another term for depreciated cost is net book value.

The formula for depreciated cost is:

Depreciated Cost = Original Asset Price - Accumulated Depreciation

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 commercial real estate 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.