Book Value

Investment Dictionary -> Book Value

The book value or the net asset value, as termed in the United Kingdom, has different applications. Firstly, it determines the floor for the stock prices in the event of the worst-case scenario. Secondly, the term book value refers to the per share value. This means that in the balance sheet, the equity is divided by the number of shares. Thirdly, the book value indicates the value of a certain asset according to the statement of financial position. The calculation of the book value deduces any depreciations, amortizations, and impairment costs from the original cost of the assets. In other words, the book value refers to the total assets less the intangible assets and liabilities. Goodwill and intangible assets are sometimes included in the calculation of the book value. The term tangible book value indicates that goodwill and other non-cash assets are excluded.

The acquisition cost of an asset represents its initial book value. In has to be mentioned that some items are not booked as assets. For instance, irregular and occasional supplies will be recorded as expenses. After the initial recording, depression, amortization, and depletion are employed to reduce the assets` book value. Depreciation indicates the reduction in value for tangible assets such as buildings and equipment. Note that land is not subject to depreciation. Amortization reflects the decline in value for intangible assets (for instance, patents and trademarks). Finally, depletion records the level of consumption of natural resources. The calculation of the trial balance precedes the recording of non-cash expenses. This procedure ensures that the cash operations are recorded precisely. Valuation changes of assets and liabilities are recorded in the form of contra accounts. The term accumulated depreciation refers to contra asset account that is employed to record depreciation. Then, the valuation of an asset represents the costs less the accumulated depreciation.

Several factors may account for changes in the book value. The sale of shares or units will increase the total book value. The issuance of additional shares at a higher price has a similar effect. On the opposite, the book value decreases when dividends are paid out. Comprehensive losses also decrease the book value.

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