Net of Depreciation
“Net of depreciation” typically refers to the value of an asset after accounting for depreciation. Depreciation is the method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. It represents how much of an asset’s value has been used up over time.
When an asset’s value is reported “net of depreciation”, it means the asset’s cost or gross value has been reduced by the accumulated depreciation. The resulting value, also known as carrying value or book value, is what’s reflected on the balance sheet.
Example of Net of Depreciation
Imagine that a delivery company called “QuickDeliver” purchases a delivery truck for $50,000. The truck is expected to have a useful life of 5 years, and at the end of those 5 years, it’s estimated to have a salvage value of $10,000.
The company uses straight-line depreciation, meaning it will depreciate the truck by an equal amount each year. The annual depreciation would be calculated as follows:
Annual Depreciation = (Cost of Asset – Salvage Value) / Useful Life
Substituting in the given values:
Annual Depreciation = ($50,000 – $10,000) / 5 = $8,000
So, the truck depreciates by $8,000 each year.
After 1 year, the accumulated depreciation is $8,000. The truck’s value, net of depreciation, is now $42,000 ($50,000 initial cost – $8,000 depreciation).
After 2 years, the accumulated depreciation is $16,000. The truck’s value, net of depreciation, is now $34,000 ($50,000 initial cost – $16,000 depreciation).
This continues each year until the end of the 5-year period, at which point the truck’s value, net of depreciation, will be $10,000 (which is the salvage value).
