What it means
Every long-lived asset starts life in the accounts at what it cost to buy and bring into use. Each year a portion of that cost is charged to profit as depreciation, and the running total of those charges is subtracted from the original figure to give the depreciated cost shown on the balance sheet.
The number moves in one direction only under normal accounting, falling each year until it reaches the asset's salvage value or zero. An asset that is fully depreciated but still in daily use sits at zero or at a token residual amount, which is why some businesses run productive machinery that appears worthless in their own accounts.
Depreciated cost matters most at the moment an asset leaves the business. The gain or loss on disposal is the sale proceeds minus the depreciated cost, so an asset sold for more than its carrying amount produces a book profit even though no bargain was struck.
Lenders and buyers read depreciated cost with caution because the depreciation method chosen changes the answer. A reducing balance method writes value down faster in early years than a straight line method, so two identical machines bought on the same day can carry very different figures.
The concept also appears under the label historical cost less accumulated depreciation, which is the default measurement basis for most fixed assets. Where an asset's recoverable amount falls below its depreciated cost, an impairment charge brings the carrying amount down separately from ordinary depreciation.
In practice
Real-world examples.
Example
A gym bought $120,000 of weights and machines four years ago and has charged $15,000 of depreciation a year. The depreciated cost is $120,000 - $60,000 = $60,000, which the finance manager uses as the starting point when negotiating insurance cover for the equipment.
Example
An engineering firm applying for a loan is asked for the depreciated cost of its plant. The figure is $340,000, but an independent valuer puts the resale value at $520,000 because the machines have been maintained unusually well, so the bank lends against the valuation rather than the accounts.
Example
A design agency writes its laptops down over three years and finds that a batch bought in 2022 now sits at zero depreciated cost. The machines still work, so they remain in service and appear on the asset register at nil value until they are finally scrapped.
Formula
Calculation
Depreciated cost = original cost - accumulated depreciation.
A courier business buys a delivery van for $45,000. It expects to use the van for five years and then sell it for around $5,000, and it uses straight line depreciation.
Annual depreciation = ($45,000 - $5,000) / 5 = $40,000 / 5 = $8,000 per year.
After three years, accumulated depreciation = 3 x $8,000 = $24,000.
Depreciated cost after three years = $45,000 - $24,000 = $21,000.
If the business sells the van at that point for $17,000, it records a loss on disposal of $21,000 - $17,000 = $4,000, because the accounts had been carrying the vehicle at $4,000 more than the market was willing to pay.Case study
Seen in the real world.
This is an illustrative and clearly fictional scenario. Tamarind Logistics, an invented haulage business, put its fleet up for sale when it decided to outsource distribution. The balance sheet showed 24 trucks at a combined depreciated cost of $1,150,000, and the board built its exit plan around recovering roughly that amount.
The actual offers came in at about $1,600,000, because the company had depreciated the trucks over six years while the second-hand market valued well-maintained vehicles of that age far more generously. The sale produced a book gain of $450,000 that nobody had budgeted for, along with an unexpected tax charge on the balancing figure.
The illustrative lesson is that depreciated cost is a bookkeeping convention reflecting a past estimate of useful life, not a forecast of what an asset will fetch, and planning a disposal around it can be misleading in either direction.
Watch out
Common mistakes.
- Treating depreciated cost as the market value of an asset, when it only reflects the cost paid and the depreciation policy chosen years earlier.
- Forgetting that depreciated cost cannot fall below the estimated salvage value, so charging depreciation past that point overstates the expense.
- Comparing the depreciated cost of assets across two companies without checking whether they use the same depreciation methods and useful lives.
Questions
People also ask.
Is depreciated cost the same as net book value?
Yes, the two terms describe the same figure, original cost minus accumulated depreciation, and carrying amount is a third name for it.
What happens to depreciated cost if an asset is revalued?
Under revaluation accounting the carrying amount is reset to the new valuation and future depreciation is charged on that higher or lower figure instead of the original cost.
Can depreciated cost ever be zero while the asset is still in use?
Yes, and it is common, since an asset that outlives its estimated useful life simply stays on the register at zero or a nominal residual value.
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