Name the scoreboard: cost, accumulated depreciation, and book value. Scan the system.
Three Numbers That Tell the Story of Every Asset
In Phase 1, you saw why Sarah cannot expense her $15,000 printer all at once. Now you will learn the three numbers that track an asset's value over time — and how they connect to the formula: Book Value = Cost - Accumulated Depreciation.
Every long-term asset has three numbers that investors and accountants track. Think of these as the "scoreboard" for the asset's life:
Cost
What you paid to acquire the asset and get it ready to use. This includes the purchase price, delivery, installation, and any setup costs. This number never changes once the asset is placed in service.
Sarah's printer: $15,000
Accumulated Depreciation
The running total of how much of the asset's cost has been allocated to expense so far. This number grows each year as the asset is "used up." It starts at $0 and increases until the asset is fully depreciated.
Year 1: $3,000 | Year 2: $6,000 | Year 3: $9,000...
Book Value
What the asset is still worth on the company's records. This number shrinks each year as accumulated depreciation grows. When the asset is fully depreciated, book value equals its estimated salvage value.
Year 0: $15,000 | Year 1: $12,000 | Year 2: $9,000...
Book Value = Cost - Accumulated Depreciation
$15,000 - $3,000 = $12,000 (after Year 1)
1. What does 'accumulated depreciation' represent?
2. If Sarah's printer cost $15,000 and has accumulated depreciation of $6,000, what is its book value?
3. Why does book value decrease over time?
Discussion Prompt (3 minutes):
Sarah buys a $15,000 printer that will last 5 years. After 2 years, the accumulated depreciation is $6,000.
- What is the printer's book value after 2 years?
- Will the cost ever change from $15,000? Why or why not?
- What will the book value be after 5 years if the printer has no salvage value?
Here is how the scoreboard changes over the life of Sarah's $15,000 printer (assuming straight-line depreciation with no salvage value):
| Year | Cost | Accumulated Depreciation | Book Value |
|---|---|---|---|
| Purchase (Year 0) | $15,000 | $0 | $15,000 |
| End of Year 1 | $15,000 | $3,000 | $12,000 |
| End of Year 2 | $15,000 | $6,000 | $9,000 |
| End of Year 3 | $15,000 | $9,000 | $6,000 |
| End of Year 4 | $15,000 | $12,000 | $3,000 |
| End of Year 5 | $15,000 | $15,000 | $0 |
Notice: Cost stays the same. Accumulated depreciation grows by $3,000 each year. Book value shrinks by $3,000 each year. This pattern is the heart of depreciation.