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Book Value of Asset

Article by Reviewed by
Madhuri Thakur Dheeraj Vaidya, CFA, FRM

Book Value of Asset Definition

Book Value of Assets is defined as the value of an asset in the books of
records of a company or institution or an individual at any given instance.
For companies, it is calculated as the original cost of the asset less
accumulated depreciation and impairment costs.

Book Value of Assets Formula

Assets Book Value Formula = Total Value of an Asset – Depreciation –
Other Expenses Directly Related to it

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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

Examples of Book Value of Assets

Example #1

ABC Corp purchased a water purifying system for office use in 2015 at
$20,000. The useful life of the purifier was estimated to be 5 years.
Calculate the book value of the purifier at the end of 2017 ﴾use the
straight‐line method of depreciation for calculation﴿.

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 purifier, book
value of 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. In order 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 on March 31st, 2015, its total stockholder equity is $1,250,000.
Calculate the book value of each stock as on 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

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

Disadvantages
The biggest disadvantage for 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.

It is not the right indicator of a company’s growth. Certain companies

may not rely on assets completely, and their business may be grown
manifold based on the services they provide. However, book value for
such firms may be much lower to their earnings ratios.

 Limitations

It does not denote the asset’s market value. It is that value which can be
registered in the balance sheet of the company. However, there are
other costs ﴾or other factors﴿ involved in the calculation of the asset’s
market value.

At a given point in time, the value of a particular asset﴾s﴿ may or may not
be rightly calculated, which may lead to incorrect book value of the firm.
Since book value depends on a lot of 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. Hence it is difficult to rely completely on book value for
 valuation. This value may change over a period of a few days or maybe
stagnant.

 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 costs of

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

The Value of stocks increases if additional shares are issued by the firm.

Conclusion
Book Value may be a primitive method of calculating an asset’s value, as
there are a number of new methods that give more accurate results, but it
still lies at the base of a lot of reporting statements like the balance sheet.
It works as a base to 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.

Recommended Articles
This has been a guide to what is Book Value of Assets and its definition. Here
we discuss the formula to calculate the book value of assets along with some
practical examples and also its 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

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