Book Value of Asset Definition
Book Value of Assets is defined as the value of an asset in the books of records of a company or institution or an individual at any given instance. For companies, it is calculated as the original cost of the asset less accumulated depreciation and impairment costs.
Book Value of Assets Formula
- Total Value of the asset = Value at which the asset is purchased
- Depreciation = Periodic reduction in the value of the asset amortized as per standards
- Other Cost = Include impairment cost and related costs which directly affect the cost of the asset
Examples of Book Value of Assets
ABC Corp purchased a water purifying system for office use in 2015 at $20,000. The useful life of the purifier was estimated to be 5 years. Calculate the book value of the purifier at the end of 2017 (use the straight-line method of depreciation for calculation).
- Purchase Cost of the purifier: $20,000.
- Useful life: 5 years
Using straight-line method of depreciation for calculation, each year depreciation value = $20,000 / 5
Hence, assuming there are no other costs involved for the purifier, book value of asset at the end of 2017
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= $20,000 – 4,000
Since 2017 will consider 2 cycles of depreciation.
Big Holdings, Inc. is expanding its business of real estate and wishes to acquire Manpower Consultants, which deals in lease administration and due diligence for its clients. In order to find out the book value of Manpower Consultants, Big Holdings analyzes the below data –
- The Total Asset Value as of date: $800,000
- Total Preferred Stock value as of date: $100,000
- Total Common Stock value as of date: $200,000
- Value of Patents it currently holds: $150,000
Book Value of Manpower Consultants = Total Assets – Total Liabilities
The calculation will be –
= $800,000 – ($100,000 + $200,000 + $150,000)
A company issues common stocks equal to 1,000,000 in the market, and as on March 31st, 2015, its total stockholder equity is $1,250,000. Calculate the book value of each stock as on that date.
- Total number of stocks: 1,000,000
- Total Stockholders’ equity: $1,250,000
Book Value per Stock can be calculated as follows,
=$1,250,000 / 1,000,000
- It can be calculated for any asset, be it tangible assets like machinery, buildings, or land or intangible assets like the company or shares.
- It can be calculated for all assets irrespective of their life. It does not depend on the life of the asset. Hence, at any given point in time, all assets have some book value before the end of their useful life.
- It indicates the scope of depreciation that can be calculated in the future for that particular asset.
- It is used as the base at the time of liquidation of a firm; or any of its specific assets;
- It is used in market analysis for a firm in the form of ratios. Certain ratios, which include book value of stocks, can be helpful in understanding returns or the market price of that stock.
- The biggest disadvantage for calculating book value is that it does not necessarily give the asset or the company’s market value. It may be close to the market value yet may or may not be the exact market value.
- It is not the right indicator of a company’s growth. Certain companies may not rely on assets completely, and their business may be grown manifold based on the services they provide. However, book value for such firms may be much lower to their earnings ratios.
- It does not denote the asset’s market value. It is that value which can be registered in the balance sheet of the company. However, there are other costs (or other factors) involved in the calculation of the asset’s market value.
- At a given point in time, the value of a particular asset(s) may or may not be rightly calculated, which may lead to incorrect book value of the firm. Since book value depends on a lot of underlying factors, its calculation is very critical for accurate results.
- Once again, book value gets calculated only at set frequencies or on a particular date. Hence it is difficult to rely completely on book value for valuation. This value may change over a period of a few days or maybe stagnant.
Important Points to Note About Change in Book Value of Assets
- It changes as market trends change. An increase or decrease in demand for the asset in question will change its value.
- It differs as per the location of the asset. Reasons include costs of maintenance in different regions, weather, demand and supply patterns, transportation costs, and government duties and other favorable (or unfavorable) policies, etc.
- Book Value changes as it changes hands. A second-hand asset may have a lower book value than the originally held asset, since the purchase cost may be higher than holding a cost.
- The Value of stocks increases if additional shares are issued by the firm.
Book Value may be a primitive method of calculating an asset’s value, as there are a number of new methods that give more accurate results, but it still lies at the base of a lot of reporting statements like the balance sheet. It works as a base to primary analysis of a company’s earnings, with more complicated analysis to follow as per analyst requirements. However, success is achieved only if the book value calculation is accurate and considers all its parameters.
This has been a guide to what is Book Value of Assets and its definition. Here we discuss the formula to calculate the book value of assets along with some practical examples and also its advantages and disadvantages. You can learn more about accounting from the following articles –