Carrying value, or the carrying amount, or the book value, is the value of assets based on figures in the balance sheet. It is the cost of an asset less any depreciation or amortization or accumulated amount. The carrying amount is very different from the market value, which depends on the supply and demand of the asset.
Generally, the balance sheet does not include the actual carrying amount, and instead, we need to calculate it using the balance sheet numbers. We need to use the cost price of the asset and any accumulated depreciation or amortization expense from the balance to arrive at the carrying amount.
The concept of carrying amount applies to all types of assets, including fixed and current. When talking about fixed assets, the carrying value of machinery, for example, would be the original cost less accumulated depreciation.
Carrying Value – Examples
Let us understand the carrying amount of different asset types with the help of a few examples:
Suppose a company has an Accounts Receivable of $10,000, while the Allowance for Doubtful Accounts is at $2,000. In this case, the carrying amount would be $8,000 ($10,000 Less $2,000).
Suppose Company A has a vehicle with an original cost of $20,000. The Accumulated Depreciation on the car is $5,000. The carrying amount, in this case, will be $15,000 ($20,000 Less $5,000)
For a bond, the carrying amount is the par value of the bond, plus (or less) any unamortized premium (unamortized discount). The same amount appears on the balance sheet of the company as well, and we call it the book value of the bond.
For those unaware, the premium is the amount that investors pay over the par value of the bond. Discount is when investors acquire bonds at less than the par value. In accounting, we amortize these premiums and discounts over the life of the bond.
Formula to calculate the carrying value of a bond is –
Face value of bond Plus unamortized premium Less unamortized discount Less Unamortized Issue Costs.
Company A has Bonds payable of $50,000 on which the Unamortized Discount is $10,000, while the Unamortized Issue Costs is $5,000. The carrying amount for the Bonds, in this case, will be $35,000 ($50,000 Less $10,000 Less $5,000).
Suppose Company A has a patent whose original cost is $20,000. The amortization expense on the patent is $6,000. The carrying amount, in this case, will be $14,000 ($20,000 Less $6,000)
Carrying Value vs. Market Value
The fundamental difference between the two is that the carrying amount depends on the value in the company’s books or the balance sheet. Market value, on the other hand, is based on supply and demand factors.
For example, a company bought a building five years back. In the market, there is an appreciation in the value of the building. But, the company has been depreciating the building over the years. The appreciation in value reflects the market value of the building, while the book value of the building is the carrying amount.
A company that takes good care of its assets may find that the market value of its assets is more than the market value of identical assets in the market. It could further widen the gap between the carrying and market value of the asset. The carrying amount, however, depends on the depreciation method that a company selects.
The carrying amount of an asset is always dropping. On the other hand, the market value may decrease or increase depending on the demand and supply for that asset.
The concept of carrying amount is fundamental. It helps a manager to quickly calculate the book value of an asset by just looking at the balance sheet. Moreover, the carrying amount is also useful for analysts when analyzing the financial statements of a company. However, for several decisions, we need to look at a market value too. Carrying value alone is not enough.