how written down value works
in accounting there are various conventions designed to better match sales and expenses to the period in which they are incurred one approach that companies often embrace is referred to as depreciation or amortization companies generally use depreciation for physical assets such as machinery and amortization for intangible assets such as patents and software both methods permit firms to expense resources of economic value over a longer timeframe in other words rather than deduct the full purchase price from net income ni right away companies can stretch the cost of assets over many different periods for example if a company bought a piece of machinery it wouldn t have to expense it in the year that it was bought but can stretch out the cost of the machinery over a number of years until it is sold or disused a period known as its useful life written down value is a method used to determine a previously purchased asset s current worth and is calculated by subtracting accumulated depreciation or amortization from the asset s original value the resulting figure will appear on the company s balance sheet amortization methodsamortization can be used to write down the value of debt or intangible assets and is slightly more complicated than depreciation methods the asset s book value is reduced on the company s books according to a set schedule various methods can be used for amortizing different types of assets intangible assets such as patents are typically written down annually bonds on the other hand often use an effective interest method of amortization meanwhile amortization schedules for outstanding loans normally follow the repayment schedule of the loan with differentiation for interest and principal some additional amortization methods are also available including diminishing balance and ballooning the written down value of an amortized asset is important because it helps the company to keep tabs on them when an asset is amortized to zero it can be taken off the books or may need to be renewed depreciation methodswritten down value can be calculated by a method of depreciation that is sometimes called the diminishing balance method this accounting technique reduces the value of an asset by a set percentage each year various other depreciation techniques also exist in accounting and are used to capitalize the expenses of different types of assets one example is straight line depreciation which deducts the same cost every year based on dividing the difference between the asset s cost and its expected salvage value by the number of years it is expected to be used the written down value of a depreciated asset is important because it is included in the comprehensive value of a company s total assets depreciated assets typically start on the books at their purchased price and are often sold before they are depreciated to zero the depreciated value of an asset is also important in helping to determine the selling price of the asset when selling the asset the book value is used to help determine the minimum value for which it will be sold real assets typically sell for a price range within their book value and the highest fair market value if a gain occurs from the sale of an asset it will be taxable in most cases the taxable gain on a sale is often determined by comparing the sales from the item to its written down value 