Accounting Terms: Understanding Book Value

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Book value is a valuation concept relating to the companies’ or individual assets, that is the value at which assets and liabilities on the balance sheet.

Commercial and tax law identify the book value of the cost of a single asset, and recognized in the rule is existing commercial value or depreciation.

This approach is prescribed by law and differs from the real value (which is referred to in the tax law as part of value or common value) of an asset, as a rule. The conversion pertains to tax book value, the lowest valuation, but there is also common value and intermediate value included.

From an entire company book value comes the value attributable to the business owners equity. For this purpose the reduction of all assets involves its liabilities and other special items. In an alternative process, the intangible assets are also deducted.

Monthly or annual depreciation, amortization and depletion are employed for bringing down the book value of assets over a period of time, as they are consumed in the process of securing revenue.

Such non-cash costs are registered in the accounting records following a trial balance, and computed to guarantee that hard cash transactions are correctly filed.

On the other hand, depreciation is utilized for entering the diminishing value of buildings and equipment over a period of time. Depletion is employed for entering the deployment of natural resources. While amortization is applied for registering the diminishing value of intangibles which include patents.

The company code book value per share indicates the amount of equity attributable to shareholders per share. The book value considers only the balance-sheet value of assets, but not any hidden assets or hidden liabilities. It also supports the accounting system (eg HGB, U.S. GAAP or IFRS) and contributes to different balance sheet valuations.

A more meaningful for the business valuation system which is based on market or replacement value of assets is the net asset value. For many, the book value balance sheet items reflect the actual value, for example, a bank credit of $100 is actually worth that amount.

However, book value of assets may differ significantly from the true value. This may be the case in connection with real estate and equity packages. Real estate may have been almost written off, but can still hold considerable value. Whenever an asset is sold above its book value this points to an accounting profit.

 

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