In accounting,book value (orcarrying value) is the value of anasset according to itsbalance sheet account balance.[1] For assets, the value is based on the original cost of the asset less anydepreciation,amortization orimpairment costs made against the asset. Traditionally, a company's book value is itstotal assets[clarification needed] minusintangible assets and liabilities.[2] However, in practice, depending on the source of the calculation, book value may variably includegoodwill,intangible assets, or both.[3] The value inherent in its workforce, part of theintellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to betangible book value.
In the United Kingdom, the termnet asset value may refer to the book value of a company.
An asset's initial book value is its actual cash value or its acquisition cost. Cash assets are recorded or "booked" at actual cash value. Assets such as buildings, land and equipment are valued based on their acquisition cost, which includes the actual cash cost of the asset plus certain costs tied to the purchase of the asset, such as broker fees. Not all purchased items are recorded as assets; incidental supplies are recorded as expenses. Some assets might be recorded as current expenses for tax purposes. An example of this is assets purchased and expensed underSection 179 of the U.S. tax code.[citation needed]
Monthly or annualdepreciation,amortization anddepletion are used to reduce the book value of assets over time as they are "consumed" or used up in the process of obtaining revenue.[4] These non-cash expenses are recorded in the accounting booksafter atrial balance is calculated to ensure that cash transactions have been recorded accurately. Depreciation is used to record the declining value of buildings and equipment over time. Land is not depreciated. Amortization is used to record the declining value of intangible assets such as patents. Depletion is used to record the consumption of natural resources.[5]
Depreciation, amortization and depletion are recorded as expenses against acontra account. Contra accounts are used in bookkeeping to record asset and liability valuation changes.Accumulated depreciation is a contra-asset account used to record asset depreciation.[6]
Samplegeneral journal entry for depreciation[7]
The balance sheet valuation for an asset is the asset's cost basis minus accumulated depreciation.[8] Similar bookkeeping transactions are used to record amortization and depletion.
"Discount on notes payable" is a contra-liability account which decreases the balance sheet valuation of the liability.[9]
When a company sells (issues)bonds, this debt is along-term liability on the company's balance sheet, recorded in the account Bonds Payable based on the contract amount. After the bonds are sold, the book value of Bonds Payable is increased or decreased to reflect the actual amount received in payment for the bonds. If the bonds sell for less thanface value, the contra account Discount on Bonds Payable is debited for the difference between the amount of cash received and the face value of the bonds.[10]
In the United Kingdom, the termnet asset value may refer to book value.
Amutual fund is an entity which primarily ownsfinancial assets orcapital assets such as bonds, stocks and commercial paper. Thenet asset value of a mutual fund is the market value of assets owned by the fund minus the fund's liabilities.[11] This is similar to shareholders' equity, except the asset valuation is market-based rather than based on acquisition cost. In financial news reporting, the reported net asset value of a mutual fund is the net asset value of a single share in the fund. In the mutual fund's accounting records, the financial assets are recorded at acquisition cost. When assets are sold, the fund records a capital gain or capital loss.[citation needed]
Financial assets include stock shares and bonds owned by an individual or company.[12] These may be reported on the individual or company balance sheet at cost or at market value.
A company or corporation's book value, as an asset held by a separate economic entity, is the company or corporation'sshareholders' equity, the acquisition cost of the shares, or the market value of the shares owned by the separate economic entity.
A corporation's book value is used in fundamental financial analysis to help determine whether the market value of corporate shares is above or below the book value of corporate shares. Neither market value nor book value is an unbiased estimate of a corporation's value. The corporation's bookkeeping or accounting records do not generally reflect the market value of assets and liabilities, and the market or trade value of the corporation's stock is subject to variations.
A variation of book value,tangible common equity, has recently come into use by the U.S. federal government in the valuation of troubled banks.[13][14] Tangible common equity is calculated as total book value minusintangible assets,goodwill, andpreferred equity, and can thus be considered the most conservative valuation of a company and the best approximation of its value should it be forced to liquidate.[15]
Since tangible common equity subtracts preferred equity from the tangible book value, it does a better job estimating what the value of the company is to holders of specificallycommon stock compared to standard calculations of book value.
To clearly distinguish themarket price of shares from the coreownership equity orshareholders' equity, the termbook value is often used since it focuses on the values that have been added and subtracted in the accounting books of a business (assets – liabilities). The term is also used to distinguish between themarket price of any asset and its accounting value which depends more onhistorical cost anddepreciation. It may be used interchangeably with carrying value. While it can be used to refer to the business' totalequity, it is most often used:
The issue of more shares does not necessarily decrease the value of the current owner. While it is correct that when the number of shares is doubled the EPS will be cut in half, it is too simple to be the full story. It all depends on how much was paid for the new shares and what return the new capital earns once invested. See the discussion atstock dilution.
Book value is often used interchangeably withnet book value orcarrying value, which is the original acquisition cost less accumulateddepreciation,depletion oramortization. Book value is the term which means the value of the firm as per the books of the company. It is the value at which the assets are valued in the balance sheet of the company as on the given date.
Amount that an asset or liability shows on the balance sheet of a company. Also known as carrying value.
Authority control databases: National |
|---|