Net book value is the amount at which an organization records an asset in its accounting records. Net book value is calculated as the original cost of an asset, minus any accumulated depreciation, accumulated depletion, accumulated amortization, and accumulated impairment.
The original cost of an asset is the acquisition cost of the asset, which is the cost required to not only purchase or construct the asset, but also to bring it to the location and condition intended for it by management. Thus, the original cost of an asset may include such items as the purchase price of the asset, sales taxes, delivery charges, customs duties, and setup costs.
The depreciation, depletion, or amortization associated with an asset is the process by which the original cost of the asset is ratably charged to expense over its useful life, less any estimated salvage value. Thus, the net book value of an asset should decline at a continuous and predictable rate over its useful life. At the end of its useful life, the net book value of an asset should approximately equal its salvage value.
Impairment is a situation where the market value of an asset is less than its net book value, in which case the accountant writes down the remaining net book value of the asset to its market value. Thus, an impairment charge can have a sudden downward impact on the net book value of an asset.
Net book value represents an accounting methodology for the gradual reduction in the recorded cost of a fixed asset. It does not necessarily equal the market price of a fixed asset at any point in time. Nonetheless, it is one of several measures that can be used to derive a valuation for a business.
Net Book Value Example
ABC International acquires a machine for $50,000. Management expects that it will have a salvage value of $10,000 and a useful life of ten years. The company uses the straight-line method to depreciate the machine. This means that the machine is being depreciated at a rate of $4,000 per year, which is calculated as:
($50,000 Cost - $10,000 Salvage value) / 10 Years = $4,000 Depreciation/year
Thus, after three years, ABC has recorded depreciation of $12,000 for the machine, which means that the asset now has a net book value of $38,000.
Net book value is also known as net carrying amount or net asset value.