Sometimes known as carrying value or book value, carrying amount is a term used to describe the value of an asset that is listed or carried on a company’s balance sheet. This figure is different from the current market value of that asset, since it is based on the original purchase price and also accounts for any depreciation, impairment costs, or other factors that may have some impact on that book value. Tracking the carrying amount of a long-term asset is important to the task of maintaining an accurate record of the company’s financial condition, as well as allowing the business to take advantage of any tax breaks that may be associated with those assets.
The calculation of the carrying amount begins with the identification of the purchase price associated with the asset. From there, the application of any events and factors that lead to some loss from that original value are captured, usually on an annual basis. Depreciation is one of the more common examples of a factor that will alter the carrying amount of an asset over time. For example, if the company purchases several vehicles that are used in the course of doing business, those vehicles will be subject to losing a certain amount of book value each calendar year. The rate of depreciation will depend on governmental regulations that allow the company to apply a certain amount of depreciation to the asset during each tax period.
One of the chief benefits of accurately tracking the carrying amount of any asset is to take advantage of tax breaks that various tax agencies offer companies. Depending on how the tax laws are written, certain assets may be depreciated each tax year by a certain amount, effectively allowing the owner to owe fewer taxes for those assets. This means that overall the business may be assessed a lower rate of tax, which in turn means more of the revenue of the business can be retained for other purposes, such as creating additional reserves for the business or using the money to fund an expansion effort.
It is important to recognize that the carrying amount of an asset is very different from the current market value of that same asset. Depending on what is happening in the marketplace, a company may be able to sell that asset for a price that is considerably higher than the book value carried in its accounting records. At the same time, conditions in the market could also mean that the current market value is less than the carrying amount. Typically, company owners will not sell an asset in the marketplace for less than the carrying amount unless there is a strong need to generate cash immediately.