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In accounting, book value is the value of an asset according to its
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
account balance. For assets, the value is based on the original cost of the asset less any
depreciation In accountancy Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been ...

depreciation
,
amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academi ...
or impairment costs made against the asset. Traditionally, a company's book value is its minus
intangible asset An intangible asset is an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive econom ...
s and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill,
intangible asset An intangible asset is an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive econom ...
s, or both.Graham and Dodd's ''Security Analysis'', Fifth Edition, pp 318 – 319 The value inherent in its workforce, part of the
intellectual capitalIntellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people (human capital), the value relati ...
of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be "tangible book value". In the United Kingdom, the term
net asset value Net asset value (NAV) is the value of an entity's asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to p ...
may refer to the book value of a company.


Asset book value

An asset's initial book value is its actual cash value or its acquisition cost. Cash assets are recorded or "booked" at actual cash value. Assets such as buildings, land and equipment are valued based on their acquisition cost, which includes the actual cash cost of the asset plus certain costs tied to the purchase of the asset, such as broker fees. Not all purchased items are recorded as assets; incidental supplies are recorded as expenses. Some assets might be recorded as current expenses for tax purposes. An example of this is assets purchased and expensed under Section 179 of the US tax code.


Depreciable, amortizable and depletable assets

Monthly or annual
depreciation In accountancy Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been ...

depreciation
,
amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academi ...
and depletion are used to reduce the book value of assets over time as they are "consumed" or used up in the process of obtaining revenue. These non-cash expenses are recorded in the accounting books ''after'' a
trial balance A trial balance is a list of all the general ledger In bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organisations. It involves preparing source documents ...
is calculated to ensure that cash transactions have been recorded accurately. Depreciation is used to record the declining value of buildings and equipment over time. Land is not depreciated. Amortization is used to record the declining value of intangible assets such as patents. Depletion is used to record the consumption of natural resources. Depreciation, amortization and depletion are recorded as expenses against a
contra account Debits and credits in double entry bookkeeping are entries made in account ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, would record tr ...
. Contra accounts are used in bookkeeping to record asset and liability valuation changes. "Accumulated depreciation" is a contra-asset account used to record asset depreciation. Sample
general journal A general journal is a daybook or subsidiary journal in which transactions relating to adjustment entries, opening stock, depreciation, accounting errors etc. are recorded. The source documents for general journal entries may be journal vouchers ...
entry for depreciation * Depreciation expenses: building... debit = $150, under expenses in retained earnings * Accumulated depreciation: building... credit = $150, under assets The balance sheet valuation for an asset is the asset's cost basis minus accumulated depreciation. Similar bookkeeping transactions are used to record amortization and depletion. "Discount on notes payable" is a contra-liability account which decreases the balance sheet valuation of the liability. When a company sells (issues)
bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of ...
s, this debt is a long-term liability on the company's balance sheet, recorded in the account Bonds Payable based on the contract amount. After the bonds are sold, the book value of Bonds Payable is increased or decreased to reflect the actual amount received in payment for the bonds. If the bonds sell for less than
face value The face value, sometimes called nominal value, is the value of a coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon'', "mine ...
, the contra account Discount on Bonds Payable is debited for the difference between the amount of cash received and the face value of the bonds.


Net asset value

In the United Kingdom, the term
net asset value Net asset value (NAV) is the value of an entity's asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to p ...
may refer to book value. A
mutual fund A mutual fund is a professionally managed investment fund An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the ri ...
is an entity which primarily owns "financial assets" or
capital asset A capital asset is defined to include property of any kind held by an assessee, whether connected with their business or profession or not connected with their business or profession. It includes all kinds of property, movable or immovable, tangible ...
s such as bonds, stocks and commercial paper. The
net asset value Net asset value (NAV) is the value of an entity's asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to p ...
of a mutual fund is the market value of assets owned by the fund minus the fund's liabilities. This is similar to shareholders' equity, except the asset valuation is market-based rather than based on acquisition cost. In financial news reporting, the reported net asset value of a mutual fund is the net asset value of a single share in the fund. In the mutual fund's accounting records, the financial assets are recorded at acquisition cost. When assets are sold, the fund records a capital gain or capital loss. Financial assets include stock shares and bonds owned by an individual or company. These may be reported on the individual or company balance sheet at cost or at market value.


Corporate book value

A company or corporation's book value, as an asset held by a separate economic entity, is the company or corporation's
shareholders' equity In finance, equity is ownership of asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information ab ...
, the acquisition cost of the shares, or the market value of the shares owned by the separate economic entity. A corporation's book value is used in fundamental financial analysis to help determine whether the market value of corporate shares is above or below the book value of corporate shares. Neither market value nor book value is an unbiased estimate of a corporation's value. The corporation's bookkeeping or accounting records do not generally reflect the market value of assets and liabilities, and the market or trade value of the corporation's stock is subject to variations.


Tangible common equity

A variation of book value,
tangible common equityTangible common equity (TCE), the subset of shareholders' equity In finance, equity is ownership of asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is any ...
, has recently come into use by the US Federal Government in the valuation of troubled banks."US Eyes Large Stake in Citi", ''The Wall Street Journal'', 23 February 2009,"''Stress Test for Banks Exposes Rift on Wall St.". ''The New York Times'', 24 February 2009, Tangible common equity is calculated as total book value minus
intangible asset An intangible asset is an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive econom ...
s, goodwill, and
preferred equity Preferred stock (also called preferred shares, preference shares or simply preferreds) is a component of share capital which may have any combination of features not possessed by common stock including properties of both an equity and a debt instru ...
, and can thus be considered the most conservative valuation of a company and the best approximation of its value should it be forced to liquidate. Tangible Common Equity via Wikinvest Since tangible common equity subtracts preferred equity from the tangible book value, it does a better job estimating what the value of the company is to holders of specifically ''common'' stock compared to standard calculations of book value.


Stock pricing book value

To clearly distinguish the
market price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or b ...
of shares from the core
ownership equity In finance, equity is ownership of asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information ab ...
or
shareholders' equity In finance, equity is ownership of asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information ab ...
, the term 'book value' is often used since it focuses on the values that have been added and subtracted in the accounting books of a business (assets – liabilities). The term is also used to distinguish between the
market price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or b ...
of any asset and its accounting value which depends more on
historical cost In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been called ...
and
depreciation In accountancy Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been ...

depreciation
. It may be used interchangeably with carrying value. While it can be used to refer to the business' total
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
, it is most often used: *as a 'per share value': The balance sheet Equity value is divided by the number of shares outstanding at the date of the balance sheet (not the average o/s in the period). *as a 'diluted per share value': The Equity is bumped up by the exercise price of the options, warrants or preferred shares. Then it is divided by the number of shares that has been increased by those added.


Uses of books

#Book value is used in the
financial ratio A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statement Financial statements (or financial reports) are formal records of the financial activities and positi ...
price/book. It is a valuation metric that sets the floor for stock prices under a worst-case scenario. When a business is liquidated, the book value is what may be left over for the owners after all the debts are paid. Paying only a price/book = 1 means the investor will get all his investment back, assuming assets can be resold at their book value. Shares of capital intensive industries trade at lower price/book ratios because they generate lower earnings per dollar of assets. Business depending on human capital will generate higher earnings per dollar of assets, so will trade at higher price/book ratios. #Book value per share can be used to generate a measure of comprehensive earnings, when the opening and closing values are reconciled. BookValuePerShare, beginning of year – Dividends + ShareIssuePremium + Comprehensive EPS = BookValuePerShare, end of year.http://www.retailinvestor.org/earnings.html Use Book Value To Calculate Comprehensive EPS


Changes are caused by

#The sale of shares/units by the business increases the total book value. Book/sh will increase if the additional shares are issued at a price higher than the pre-existing book/sh. #The purchase of its own shares by the business will decrease total book value. Book/shares will decrease if more is paid for them than was received when originally issued (pre-existing book/sh). #Dividends paid out will decrease book value and book/sh. #Comprehensive earnings/losses will increase/decrease book value and book/sh. Comprehensive earnings, in this case, includes net income from the Income Statement, foreign exchange translation changes to Balance Sheet items, accounting changes applied retroactively, and the
opportunity cost In microeconomic theory Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Produ ...
of options exercised.


New share issues and dilution

The issue of more shares does not necessarily decrease the value of the current owner. While it is correct that when the number of shares is doubled the EPS will be cut in half, it is too simple to be the full story. It all depends on how much was paid for the new shares and what return the new capital earns once invested. See the discussion at
stock dilution In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...
.


Net book value of long term assets

Book value is often used interchangeably with "net book value" or "carrying value", which is the original acquisition cost less accumulated
depreciation In accountancy Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been ...

depreciation
, depletion or
amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academi ...
. Book value is the term which means the value of the firm as per the books of the company. It is the value at which the assets are valued in the balance sheet of the company as on the given date.


See also

*
Capital formation Capital formation is a concept used in macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is a social science Social science is the branch ...
*
Fixed capital In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been call ...
*
List of accounting topics This page is an index of accounting topics. {{AlphanumericTOC, align=center, nobreak=, numbers=, references=, externallinks=, top=} A Accounting ethics - Accounting information system An accounting as an information system (AIS) is a ...
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Mark to market Mark may refer to: Currency * Bosnia and Herzegovina convertible mark The Bosnia and Herzegovina convertible mark ( Bosnian/Croatian/ Serbian: , Bosnian/Serbian: ); sign: KM; code: BAM) is the currency of Bosnia and Herzegovina Bosnia and ...
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Shareholders' equity In finance, equity is ownership of asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information ab ...
*
Stock dilution In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...
*
Tangible common equityTangible common equity (TCE), the subset of shareholders' equity In finance, equity is ownership of asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is any ...


References

{{stock market Fundamental analysis Asset Valuation (finance)