Book Value of Asset Definition

Book Value of Assets Formula

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  • Total Value of the asset = Value at which the asset is purchasedDepreciation = Periodic reduction in the value of the asset amortized as per standardsOther Cost = Include impairment cost and related costs which directly affect the cost of the asset

Examples of Book Value of Assets

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

= $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: $800,000Total Preferred Stock value as of date: $100,000Total Common Stock value as of date: $200,000Value 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)

=  $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.

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

Book Value per Stock can be calculated as follows,

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

= $1.25

Advantages

  • It can be calculated for any asset, be it tangible assetsTangible AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read more 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 depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
  • read more 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;Liquidation Of A Firm;Liquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more or any of its specific assets; It is used in market analysis for a firm in the form of ratios. Certain ratios, which include the book value of stocks, can be helpful in understanding returns or the market price of that stock.

Disadvantages

  • 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.

 Limitations

  • 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 may be stagnant. Hence it isn’t easy to rely completely on book value for valuation.

 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 maintenance costs in different regions, weather, demand and supply patterns, transportation costs, government duties, 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.

Conclusion

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.

This has been a guide to Book Value of Assets and its definition. Here we discuss the formula to calculate the book value of assets and some practical examples and its advantages and disadvantages. You can learn more about accounting from the following articles –

  • Total Assets – DefinitionBook Value of a CompanyBook Value vs. Market ValueFormula of Price to Book Value