how depreciated cost works
the depreciated cost method of asset valuation is an accounting method used by businesses and individuals to determine the useful value of an asset it s important to note that the depreciated cost is not the same as the market value the market value is the price of an asset based on supply and demand in the market the depreciated cost is the value of an asset after its useful life is complete reduced over time through depreciation the depreciated cost method always allows for accounting records to show an asset at its current value as the value of the asset is constantly reduced by calculating the depreciation cost this also allows for measuring cash flows generated from the asset in relation to the value of the asset itself the formula for depreciated costdepreciated cost purchase price or cost basis cdwhere cd cumulative depreciation begin aligned text depreciated cost text purchase price or cost basis text cd textbf where text cd text cumulative depreciation end aligned depreciated cost purchase price or cost basis cdwhere cd cumulative depreciation example of depreciated costif 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 the 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 the useful life 15 years or 3 000 per year 