In accounting, the carrying value is the actual worth of an item as of a given date. For intangibles, such as accounts receivable, inventory and depository receipts, the carrying value is usually the amount at the ending date less a profit and loss consideration. However, for financial assets such as accounts payable and accounts receivable, the carrying value is the amount that would be paid to the holder or account owner upon a sale or transfer of the account. The carrying value concept is the first of three fundamental concepts in accounting. The second concept is related to liquidity, which means the ability to obtain the funds needed to pay a debt when it is due. Last but not least, another fundamental concept in accounting is profit and loss.
The carrying values of many financial assets are calculated based on future cash inflows and outflows. That is, what is the carrying value of the current stock of stocks? Or what is the carrying value of a particular company’s long-term bond? Or what is the carrying value of a company’s stock option? In short, what is the current value of whatever it is that you’re trying to measure?
One method of calculating the carrying value is by combining the current price of the stock or other assets with the future price of the same stock or assets. You do this by figuring out what the current stock or asset’s worth is in today’s market and comparing it with what it was valued at earlier in time. Sometimes this is done by using discounted value. Discounted value takes into account the fact that things change so quickly in the world.
Now, a lot of folks like to use the cost of capital to calculate what is the carrying value of an equity or ownership stock. Cost of capital is just one way of figuring out what is the carrying value. The other way is to use the dividend yield. The dividend yield is what is known as the income or return on equity. That is, what is the overall income or return on the equity of a corporation. It is calculated by dividing the income or return of equity by the total amount invested.
So, what is the carrying value on your stock? It is what your stock is worth today. But, you have to remember that if you sell your stock in the future, it will actually depreciate in price. You may see a decline in your stock’s value per share, but it may only be by a very small percentage. So, don’t believe everything you read about carrying value!
Some people are confused about what is the carrying value on a derivative. A derivative is a financial instrument that actually tracks the price of an underlying asset or commodity. An equity derivative tracks the price of equity. If you borrow money at a discount, instead of borrowing cash from yourself, you can borrow from the equity of the company with which you are doing business. Then, when you sell that equity, what is the carrying value refers to the total amount of money borrowed.
However, some of you may not know that equity itself is an underlying asset. Equity includes companies and the equity in land, buildings, and fixtures that actually own the property underlying the company. Therefore, when you buy stock, what is the carrying value actually refers to the value that is actually paid or received by you for that stock. Usually, there is an indenture that is drawn up between you and the company that actually owns the stock.
Then, there is the intrinsic value. Intrinsic value refers to what is the carrying value less the depreciation. The total amount of the carrying value less the depreciation equates to the intrinsic value. So, you will see that the carrying values are often calculated with the intrinsic value in mind. This is why, it is important to understand what is the carrying value before you actually purchase a stock.