What is the amortized cost?
The amortized cost is the value of a fixed asset net of any accumulated depreciation which has been recorded against it. In a broader economic sense, the amortized cost to industry is the total amount of capital that is “depleted” over 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.
The amortized cost is also called “salvage value”. “net book value “or” adjusted cost basis “.
Key points to remember
- Amortized cost is the value of a net asset, after deducting all of the accumulated depreciation recorded for it.
- It allows the accounting books to always carry an asset at its current value and to measure the cash flows according to this asset in proportion to the value of the asset itself.
- The amortized cost is also called “salvage value”, “net book value” or “adjusted cost base”.
The amortized cost formula is
TheAmortized cost=Purchase price (or cost base)–CDor:CD=Accumulated depreciationTheThe
The basics of amortized cost
The amortized cost method of valuing assets is an accounting method used by businesses and individuals. It allows the accounting books to always carry an asset at its current value and to measure the cash flows according to this asset in proportion to the value of the asset itself. In addition, it also allows a uniform tax treatment of large fixed assets such as houses, factories and equipment.
Example of amortized cost
As a hypothetical example, if a construction company can sell an unusable crane for parts at a price of $ 5,000, this is the amortized cost of the crane, or salvage value. If the same crane initially cost the company $ 50,000, the total amount amortized 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 the impairment for each year. The simplest method is straight-line depreciation. This means that there is no curve in the amount of the appreciation, whether it is an immediate depreciation of 30% observed when driving new cars out of the lot or an increased depreciation when an item is about to require major repairs. Using this method, the 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 maximum amount that the company can claim as depreciation for tax and sales purposes.
Learn more about depreciation
The amortized cost is associated with the accounting practice known as amortization. To learn more about this important subject of financial analysis, see also our article. An introduction to depreciation.