Final answer:
The book value of a depreciable asset is the original cost minus accumulated depreciation, not just the cost minus salvage value. It is calculated by subtracting the total accumulated depreciation from the asset's initial cost at any point in its useful life.
Step-by-step explanation:
The book value of a depreciable asset is not simply the difference between its cost and its salvage value. Instead, the book value is typically the original cost of the asset minus the accumulated depreciation over the asset's useful life. Accumulated depreciation is the total amount of depreciation expense that has been recorded against an asset over time. To calculate the book value at any given point during the asset's life, you subtract the accumulated depreciation from the initial cost.
For example, if a company purchases a piece of equipment for $100,000 and expects it to have a salvage value of $20,000 at the end of its useful life of 10 years, this does not mean the book value starts at $80,000. Instead, if the company uses straight-line depreciation, it will depreciate the asset by $8,000 per year ([$100,000 - $20,000] / 10 years). If we are looking at the book value after 3 years, the accumulated depreciation would be $24,000 (3 years / $8,000 per year), and the book value would be $76,000 ($100,000 initial cost - $24,000 accumulated depreciation).