# 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.