What is Book Value of Asset?
The book value of the asset is termed as the value that the company or an organization records in their books for a given period. The business determines the B.V of assets as the difference between the original historical cost and the accumulated depreciation.
The B.V of asset can be accessed on the balance sheet of the business. It can be described as the net asset cost when accumulated depreciation is deducted from the total fixed asset cost. It is also determined as the difference between the total assets and intangible assets such as goodwill, patents, and other liabilities.
Normally book value has two broad applications. In the event of liquidation, let the shareholders know how much they would be entitled to get. It helps the business to perform a comparative analysis between the market value of the asset and the B.V of asset. By doing such an analysis, the analyst can determine whether the asset is under-priced or overpriced.
Formula for Book Value of Asset
The B.V of asset is determined as shown below: –
Book Value of the Asset = Original Cost of Asset – Depreciation – Impairment Cost in Line with the Asset
- The cost of the asset on the date of acquisition is the original cost of the asset.
- Depreciation is the non-cash expense that is deducted from the cost of the asset at each financial period.
- Impairment cost is termed as the cost that permanently lessens the financial value or economical value of the asset.
Example of Book Value of Asset
Let us take the example of ABC corporation. The business purchased an asset for $50,000 which has a useful life of 10 years. Help the management determine the B.V of asset at the end of the financial period.
Compute the depreciation expense of the asset basis the straight-line method:
Depreciation = Cost of the Asset or Machinery / Number of Utility Years
- Depreciation = $50,000 / 10
- Depreciation = $5,000
Ending Balance of the Asset is calculated as
Ending Balance of the Asset = Beginning Balance of the Asset – Depreciation Expense
- Ending Balance of the Asset = $50,000 – $5,000
- Ending Balance of the Asset = $45,000
Therefore, at the end of year 1, the B.V of the asset be $45,000. Perform the following computations in excel to arrive at the book value of the asset: –
The following would be the results: –
How is Book Value of Asset Included in Balance Sheet?
The B.V of the fixed asset on the balance sheet is displayed in the asset section of the balance sheet. It reflects the net asset value once the accumulated depreciation and other liabilities are deducted from the beginning value of the asset at the end of each financial year.
Importance of Book Value of Asset
With the dynamic change in the trends within the market, the B.V of the asset decreases or increases with respect to the asset’s demand in the market. The book value of the asset varies with different locations where the asset is used. Different countries may have different laws as to how they maintain the asset and how they transport assets. Hence varying book values can be used for drawing a comparison with the market value of the asset.
The B.V of an asset may be higher or lower than the B.V of a similar asset as the latter may be either over-utilized or under-utilized. For assets such as shares and debentures, the value of book value appreciates if the business issues a greater number of shares or debentures issued.
Some of the advantages are:
- The B.V of the asset can be determined for both fixed and intangible assets. The book value of the machinery and buildings could be determined by deducting the accumulated depreciation from the original cost. Similarly, intangible assets such as shares and debentures can be valued at their fair value.
- The B.V can be determined through the life of the asset. The book value is updated at the end of the period. After the end of the useful life of the asset, the asset has some book value. The book value at the end of the useful life purely depends upon the value of the depreciation scope.
- The book value of the asset helps the stakeholders know the effective value of the asset once the asset is sold off. Additionally, the book value can be compared with the market value of the asset to determine whether the asset is fairly priced or under-priced.
Some of the disadvantages are:
The book value as the value of the asset has several disadvantages. It generally does not align with the market value of the asset. It may be a value that is in proximity to the market value of the asset but still by far remains de-aligned. Book value cannot be used as the indicator of growth in the value of the assets held by the company as well as its overall performance. Certain business outperforms in terms of delivering business proposition, but if the book value is compared with its earnings then it tends to reduce the overall valuation ratios.
There is always a possibility that the book value is incorrectly determined. The book value depends on several underlying factors which may not help in determining the accurate value. The book value is valued on only a specific date or on specific frequencies and not on a real-time basis. This makes the dependency on the book value has limited scope. The value may modify at the later stage of the asset life.
The book value of the asset can be termed as the method of valuing the actual value of the asset and can be regarded as the nascent method to arrive at the value of the asset. The value can be overstated or understated with the market value of the asset. It could be located in the asset section of the balance sheet.
This is a guide to Book Value of Asset. Here we also discuss the introduction and importance of book value of asset along with advantages and disadvantages. You may also have a look at the following articles to learn more –