The book value, or carrying value, of an asset is calculated by taking the original cost of the asset and subtracting any accumulated depreciation associated with it. This formula reflects the asset's current value on the balance sheet, after accounting for wear and tear or obsolescence over time. The original cost represents the purchase price, whereas accumulated depreciation allows for the reduction in value as the asset is used, which provides a more accurate representation of the asset's value at any given point.
By using this method, companies can present a realistic value of their assets to stakeholders, which is an important aspect of financial reporting. This approach ensures that the financial statements provide meaningful information regarding the net worth of the assets owned by the business, rather than simply reflecting their purchase price.