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).

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?