Depreciated Cost Definition

Depreciated cost is the value of a fixed asset net of all accumulated depreciation that has been recorded against it. In a broader economic sense, the depreciated cost for industry is the aggregate amount of capital that is "used up" in a given period, such as a fiscal year. This value can be examined for trends in capital spending and accounting aggressiveness, which can be useful in assessing competitive profiles.

Depreciated cost is also known as the "salvage value," "net book value," or "adjusted cost basis."

• Depreciated cost is the value of a fixed asset net of all accumulated depreciation that has been recorded against it.
• It allows for the books to always carry an asset at its current worth, and to measure cash flows based on that asset in proportion to the value of the asset itself.
• Depreciated cost is also known as the "salvage value," "net book value," or "adjusted cost basis."

$\begin{aligned} &\text{Depreciated Cost} = \text{Purchase Price (or Cost Basis)} - \text{Cumulative Depreciation} \\ \end{aligned}$​Depreciated Cost=Purchase Price (or Cost Basis)−Cumulative Depreciation​

The depreciated cost method of asset valuation is an accounting method used by businesses and individuals. It allows for the books to always carry an asset at its current worth, and to measure cash flows based on that asset in proportion to the value of the asset itself. Additionally, it also allows for even tax treatment of large capital assets like homes, factories and equipment.

As a hypothetical example, if a construction company can sell an inoperable crane for parts at a price of $5,000, that is the crane's depreciated cost, or salvage value. If the same crane initially cost the company $50,000, then the total amount depreciated over its useful life is $45,000.

Suppose the crane has a useful life of 15 years. At this point, the company has all the information it needs to calculate each year's depreciation. The simplest method is straight line depreciation. This means that there is no curve to the amount of appreciation, whether that is an immediate 30% depreciation seen when driving new cars off the lot or an increased depreciation when an item is close to needing major repairs. Using this method, depreciation is the same every year. It equals total depreciation ($45,000) divided by useful life (15 years), or $3,000 per year. This is the most the company can claim as depreciation for tax and sale purposes.

Depreciated cost is associated with the accounting practice known as depreciation. For more about this important topic in financial analysis, see also our article An Introduction to Depreciation.