CARRYING VALUE AS EXPLAINED BY-ER. AVINASH KULKARNI

Saturday Brain Storming Thought (242) 28/09/2024

CARRYING VALUE

Carrying Value is an accounting concept that measures the current value of an asset or company based on the figures in its balance sheet

Key Takeaways of Carrying Value

1) Carrying Value is a measure of value for a company’s assets

2) Carrying Value is typically measured as the original cost of the asset minus any depreciating factor

3) The depreciating factors for an asset vary based on the nature of the asset

4) Some assets, such as land are not considered depreciable

5) Rates of depreciation for an asset are influenced by the calculations of the company by which it is owned

Carrying Amount

The Carrying Amount is the original cost of an asset as reflected in a company’s books or balance sheet minus the accumulated depreciation of the asset

It is also known as book value

Calculation of Carrying Amount

1) Take the original cost of purchasing the asset less salvage value

2) Divide that number by the number of years the asset is expected to be of use to generate the annual depreciation amount and record annually

3) Calculate the accumulated depreciation (number of years passed X annual depreciation)

4) Subtract the accumulated depreciation from the original purchase price to get the carrying amount

Carrying Value decreases every year as an asset’s value changes over time

Importance of Carrying Value

1) Carrying Value measures the worth of a tangible or intangible asset after accounting for accumulated depreciation or amortization

2) Carrying Value doesn’t appear on a balance sheet but can be useful for optimizing the long-term use of an asset

3) The asset holder determines the rates of depreciation or amortization used to calculate carrying value

Tangible and Intangible Assets to calculate Carrying Value

1) Buildings

2) Equipment

3) Machinary

4) Computers

5) Vehicles

6) Office furniture

7) Patents

8) Copyright

9) Goodwill

Carrying Value examples

Data Assumed

1) Computers – Purchase cost Rs 1 Lakh

2) Salvage Value – Rs 10000

3) Useful life – 5 years

Calculation

1) Original cost minus salvage value

= Rs 1 Lakh – Rs 10,000

= Rs 90,000

2) Annual depreciation

= (Rs 90,000) / 5

= Rs 18,000

3) Carrying Value

a) First year
= Rs 1 Lakh – Rs 18,000
= Rs 82,000

b) Second year
= Rs 1 Lakh – (Rs 18,000 X 2)
= Rs 64,000

c) Third year
= Rs 1 Lakh – (Rs 18,000 X 3)
= Rs 46,000

4) Fourth year
= Rs 1 Lakh – (Rs 18,000 X 4)
= Rs 28,000

5) Fifth year
= Rs 1 Lakh – ( Rs 18,000 X 5)
= Rs 10,000 (ie Salvage Value)

Advantages of Carrying Value

1) Easy to calculate

2) Reflects the current value of the asset

3) Helps with Financial analysis

Disadvantages of Carrying Value

1) Does not reflect market value

2) Depreciation can be subjective

3) May not be accurate for certain assets

4) Sometimes companies may deliberately undervalue their assets in order to increase their stock price

5) A company’s carrying value may decline if its assets are sold or if it undergoes bankruptcy

6) Some investors use carrying value as a proxy for a company’s underlying worth, but this is not always accurate

7) Some investors may sell their stocks short when the price of the company’s stock is high based on carrying value

Non-current Assets

Non-current Assets are assets that a business owns that are not easily converted to cash within a year

They are also known as long-term assets

They often represent a significant portion of the total resources that a company controls

Examples of Non-current Assets

1) Land

2) Office buildings

3) Manufacturing plants

4) Vehicles

5) Natural resources

6) investments, like bonds

7) Patents & Trademarks

8) Equipment

9) Inherited customer bases

10) Acquired brands

Examples of Current Assets

1) Cash accounts

2) Certificates of deposit

3) Short-term stocks and bonds

4) Current inventory that the company can sell

5) Money owed to the company for products or services

Carrying Amount of a Non-current asset

The original cost of an asset as reflected in a company’s books or balance sheet minus the accumulated depreciation of the asset

Difference between Book Value and Carrying Value

1) Book value is derived from the accounting practice of recording an assets value based upon the original historical cost in the books minus depreciation

2) Carrying Value looks at the value of an asset over its useful life, a calculation that involves Depreciation

Carrying Value of a liability

The carrying amount of both accounts payable and accrued liabilities are the cost of goods and services received but not yet paid

The liability is recorded against the relevant expense or asset account

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