Sign Up for Discounts
This form does not yet contain any fields.
    Follow us on Facebook
    Controller Library Value Pack
    CFO Library Value Pack
    Accounting Standards Library
    Sunday
    Aug222010

    What is book value?

    Book value is an asset's original cost, less any accumulated depreciation that has been subsequently incurred. For example, if you bought a machine for $50,000 and its associated depreciation were $10,000 per year, then at the end of the second year, the machine would have a book value of $30,000.

    Book value is not necessarily the same as an asset's market value, since market value is based on supply and demand and perceived value, while book value is simply an accounting calculation.

    Book value can also refer to the amount that investors would theoretically receive if an entity liquidated, which could be approximately the shareholders' equity portion of the balance sheet if the entity liquidated all of its assets and liabilities at the values stated on the balance sheet.

    You can also determine the book value per share by dividing the number of common shares outstanding into total stockholders' equity. For example, if the stockholders' equity section of the balance sheet contained a total of $1,000,000 and there were 200,000 shares outstanding, then the book value per share would be $5.

    You can also compare the market value of the total number of an entity's outstanding shares to its book value to see if the shares are theoretically undervalued (if they sell at less than book value) or overvalued (if they sell at more than book value).

    The book value concept is overrated, since there is no direct relationship between the market value of an asset and its book value. At best, book value can only be considered a weak replacement for market value, if no other valuation information is available about an asset.

    How to Calculate Book Value

    The calculation of book value includes the following factors:

    + Original purchase price
    + Subsequent additional expenditures charged to the item
    - Accumulated depreciation
    - Impairment charges
    = Book value

    For example, a company spends $100,000 to buy a machine and subsequently spends an additional $20,000 for additions that expand the production capacity of the machine. A total of $50,000 of accumulated depreciation has since been charged against the machine, as well as a $25,000 impairment charge. The book value of the machine therefore $45,000. 

    Related Topics

    Overview of depreciation
    When do I derecognize an asset?
    When do I stop assigning costs to a fixed asset?
    Which costs can I assign to a fixed asset?

    PrintView Printer Friendly Version

    EmailEmail Article to Friend

    Reader Comments

    There are no comments for this journal entry. To create a new comment, use the form below.
    Editor Permission Required
    You must have editing permission for this entry in order to post comments.