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.

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 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 sheet. 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 firm.

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

• 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

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 depreciation 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 lease 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 -

=  $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 31^st, 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,

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

= $1.25

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:

• 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 the book value of stocks, can be helpful in understanding returns or the market price of that stock.

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.

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 –

• Total Assets - Definition
• Book Value of a Company
• Book Value vs. Market Value
• Formula of Price to Book Value