What Is Written-Down Value?
Let me tell you directly: written-down value is the value of an asset after you've accounted for depreciation or amortization. It's basically the current worth of something your company owns, from an accounting standpoint. You'll see this value listed on the balance sheet in financial statements.
You might hear it called book value or net book value—it's all the same thing.
Key Takeaways
- Written-down value is the value of an asset after accounting for depreciation or amortization.
- Depreciation is used for physical assets while amortization is used for intangible assets.
- The present worth of a previously purchased asset is represented through its written-down value.
- Written down value appears on the balance sheet and is calculated by subtracting accumulated depreciation or amortization from the asset's original value.
- Written-down value is used to monitor the value of an asset and arrive at its price when selling.
How Written-Down Value Works
In accounting, we have conventions to match sales and expenses to the right periods. One key approach is depreciation or amortization.
You generally use depreciation for physical assets like machinery, and amortization for intangible ones like patents or software. Both let you expense the asset's value over time instead of all at once. So, rather than deducting the full purchase price from net income immediately, you spread it out over several periods.
For instance, if you buy a piece of machinery, you don't expense it all in the year of purchase; you stretch the cost over its useful life until it's sold or retired.
Written-down value determines the current worth of that asset by subtracting accumulated depreciation or amortization from its original value. This figure goes right on your balance sheet.
Amortization Methods
Amortization writes down the value of debt or intangible assets, and it's a bit more complex than depreciation. You reduce the asset's book value on the books according to a schedule.
Different methods apply to different assets. Intangibles like patents are usually amortized annually. Bonds often use the effective interest method.
For loans, amortization follows the repayment schedule, separating interest and principal. Other methods include diminishing balance or ballooning.
Tracking the written-down value matters because it helps you monitor assets. When it hits zero, you can remove it from the books or renew it.
Depreciation Methods
You can calculate written-down value using depreciation methods like the diminishing balance method, which reduces the asset's value by a fixed percentage each year. Other techniques exist for capitalizing expenses on various assets.
Straight-line depreciation, for example, deducts the same amount yearly by dividing the difference between cost and salvage value by the expected years of use.
The written-down value of a depreciated asset contributes to your company's total asset value. Assets often start at purchase price and get sold before depreciating to zero.
This value also helps set the selling price. When you sell, book value sets the minimum, and real assets sell within a range up to fair market value. If there's a gain, it's usually taxable, calculated by comparing sale price to written-down value.
