The Two Main Uses of Book Value 1-25-16

The Two Main Uses of Book Value

The measurement of a company’s value is often readily associated with the day-to-day operations and key financial ratios related to output of goods and services; a business owner may consider valuation from a larger scale or as factors of his balance sheet accounts, but often not as frequently as an examination of the profit and loss statement. The balance sheet, reflecting the values associated with assets, liabilities and equity, includes a value of high importance to the business owner separate from operations. The term ‘book value’, or carrying value, actually refers to two accounting calculations: the book (or carrying) value of assets, and the overall valuation of a company.

Net Book Value: Assets

The book value of assets (also referred to as ‘net book value’) is based on the original cost of the asset less any subsequent costs, such as amortization, depreciation or impairment costs. Specifically:

Asset Cost – Accumulated Depreciation/Amortization – Impairment = NBV of Asset

The actual cash or acquisition cost of the asset is the beginning value on the balance sheet, and adjusted yearly or as needed for subsequent costs. For both the business owner and other interested accounting information users, the book value of particular or an accumulated sum of assets within a business relay the relevant value, either for resale, replacement or ratio calculations to determine financial health.

A company utilizing QuickBooks to track fixed assets, either as an item or within the additional QuickBooks Fixed Asset Manager software, includes the book value of the asset and date of purchase or acquisition within the New Asset screen. Depending on the chosen method of depreciation or amortization, then, QuickBooks calculates the carrying value of the assets as a current value, even relaying the appropriate amount associated with the asset to the balance sheet regardless of date or account filters.

Book Value: Business Valuation

Book value, as a measurement of business valuation, is calculated as total assets less intangible assets and liabilities (though, depending on the calculation, may include goodwill and intangible assets in the total book value calculation). The book value of a business may also be referred to as a business’s equity; in fact, the basic accounting formula may be easily rearranged to find this value:

Assets = Liabilities + Equity to Equity = Assets – Liabilities

A company’s book value is pertinent to financial health analysis and theoretical valuation of a company’s worth in cases of liquidation, consolidation or sale. Stockholders of publicly traded companies are particularly interested in the value of an invested company, for in the case of liquidation, this figure signals either concern or security in return of initial investment; similarly, when compared to a company’s market value, the book value determined may signal either over- or under priced stock, adding further information to decisions made by potential or current investors.