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Book Value of Asset

Updated on January 2, 2024
Article byWallstreetmojo Team
Edited bySusmita Pathak
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Book Value of Asset?

Book Value of Assets is defined as the value of an asset in the books of records of a company, institution, or 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 Asset

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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 maintenance costs in different regions, weather, demand and supply patterns, transportation costs, government duties, other favorable (or unfavorable) policies, etc.

Book Value of Assets Explained

Book Value may be a primitive method of calculating an asset’s value, as several new methods give more accurate results. However, it still lies at the base of many reporting statements like the balance sheetStatements Like The Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more. It works as a base for 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.

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 firmShares Are Issued By The FirmShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more.

Book Value, Face Value & Market Value – Video Explanation

 
 

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Formula

To know how to calculate the book value of assets, let us check the equation below:

Assets Book Value Formula = Total Value of an Asset – Depreciation – Other Expenses Directly Related to it
  • 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

Let us consider the following examples to understand the book value o f asset meaning better:

Example #1

ABC Corp purchased a water purifying system for office use in 2015 at $20,000. Calculate the book value of the cleaner at the end of 2017 (use the straight-line method of depreciation for calculation). The useful life of the cleaner was estimated to be five years.

Solution

Given

  • Purchase Cost of the purifier: $20,000.
  • Useful life: 5 years

Using straight-line method of depreciationStraight-line Method Of DepreciationStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. read more for calculation, each year depreciation value = $20,000 / 5

= $4,000

Hence, assuming there are no other costs involved for the cleaner, the book value of an asset at the end of 2017

Book Value Example 1

= $20,000 – 4,000 

= $16,000

Since 2017 will consider 2 cycles of depreciation.

Example #2

Big Holdings, Inc. is expanding its business of real estate and wishes to acquire Manpower Consultants, which deals in leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more administration and due diligence for its clients. To find out the book value of Manpower Consultants, Big Holdings analyzes the below data –

Given,

  • 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

Solution

Book Value of Manpower Consultants = Total Assets – Total Liabilities

The calculation will be –

Book Value Example 2

=  $800,000 – ($100,000 + $200,000 + $150,000)

=  $350,000

Example #3

A company issues common stocks equal to 1,000,000 in the market, and as of March 31st, 2015, its total stockholder equity is $1,250,000. Calculate the book value of each stock as of that date.

Solution

Given,

  • Total number of stocks: 1,000,000
  • Total Stockholders’ equity: $1,250,000

Book Value per Stock can be calculated as follows,

Example 3

=$1,250,000 / 1,000,000

= $1.25

Advantages

Book value of assets serve various purposes in an organization and this is what makes it highly advantageous to the companies.

Let us have a look at the benefits of book value of asset:

Disadvantages

The book value of assets also has limitations. Let us have a look at them:

  • The biggest disadvantage of 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.
  • Certain companies may not rely on assets completely, and their business may grow manifold based on their services. However, the book value for such firms may be much lower than their earnings ratios.
  • It is not the right indicator of a company’s growth.
  • That value can be registered on the company’s balance sheet. It does not denote the asset’s market value. However, there are other costs (or other factors) involved in calculating the asset’s market value.
  • At a given point in time, the value of a particular asset(s) may or may not be correctly calculated, leading to the firm’s incorrect book value. Since book value depends on many 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. This value may change over a few days or maybe stagnant. Hence it isn’t easy to rely completely on book value for valuation.

Recommended Articles

This has been a guide to what is Book Value of Assets. Here, we explain its formula along with examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

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