Definition
The financial accounting term book value refers to the original cost of an asset minus the accumulated depreciation on that same asset. The total book value of all assets can be found on the company's balance sheet.
Book value can also refer to the net value of a company, which is calculated by taking total assets and subtracting intangible assets and liabilities.
Calculation
Book Value of an Asset = Original Cost - Accumulated Depreciation
Book Value of a Company = Total Assets - Intangible Assets - Liabilities
Explanation
Also known as the carrying value of an asset, book value is the un-depreciated balance of an asset appearing on the balance sheet. As the serviceable life of an asset declines, depreciation expense is used to allocate the original cost to the accounting periods in which it is used. Depreciation allows the cost of a balance sheet item (an asset) to flow smoothly to the income statement (as an expense) over its serviceable life.
Accumulated depreciation is the total of all the depreciation expense for an asset. Subtracting the accumulated depreciation from the original cost allows the balance sheet to accurately reflect the remaining economic value of that item.
Example
Three years ago, Company A purchased a production machine for $1,000,000. The asset has a useful life of ten years. The straight line method of depreciation results in an expense of $100,000 per year. The accumulated depreciation balance would be 3 x $100,000, or $300,000. The book value of the production machine would be:
Original Cost of Asset | $1,000,000 |
Less: Accumulated Depreciation | $300,000 |
Net Book Value | $700,000 |
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorNovember 6th, 2024
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.Moneyzine EditorNovember 6th, 2024
The financial accounting term accumulated depreciation is used to describe a contra asset account that summarizes the total of all the depreciation of an asset that has occurred at a certain point in time.Moneyzine EditorNovember 6th, 2024
The financial accounting term intangible asset is used to describe those assets that lack physical structure (they cannot be seen or measured), and have a high degree of uncertainty surrounding future benefits to be derived from them. The most common types of intangible assets appearing on the balance sheet are goodwill, copyrights, trademarks, patents, franchises, and organization costs.Moneyzine EditorNovember 6th, 2024.png)
The financial accounting term liability is used to describe the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service. Liabilities are reported on a company's balance sheet.Moneyzine EditorNovember 6th, 2024
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