The value of an asset according to its balance sheet account balance
In accounting,
book value
is the value of an asset
[1]
according to its
balance sheet
account balance. For assets, the value is based on the original cost of the asset less any
depreciation
,
amortization
or
impairment costs
made against the asset. Traditionally, a company's book value is its
total assets
[
clarification needed
]
minus
intangible assets
and liabilities.
[2]
However, in practice, depending on the source of the calculation, book value may variably include
goodwill
,
intangible assets
, or both.
[3]
The value inherent in its workforce, part of the
intellectual capital
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
may refer to the book value of a company.
Asset book value
[
edit
]
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 U.S. tax code.
[
citation needed
]
Depreciable, amortizable and depletable assets
[
edit
]
Monthly or annual
depreciation
,
amortization
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.
[4]
These non-cash expenses are recorded in the accounting books
after
a
trial balance
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.
[5]
Depreciation, amortization and depletion are recorded as expenses against a
contra account
. 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.
[6]
Sample
general journal
entry for depreciation
[7]
- 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.
[8]
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.
[9]
When a company sells (issues)
bonds
, 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 contra account Discount on Bonds Payable is debited for the difference between the amount of cash received and the face value of the bonds.
[10]
Net asset value
[
edit
]
In the United Kingdom, the term
net asset value
may refer to book value.
A
mutual fund
is an entity which primarily owns
financial assets
or
capital assets
such as bonds, stocks and commercial paper. The
net asset value
of a mutual fund is the market value of assets owned by the fund minus the fund's liabilities.
[11]
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.
[
citation needed
]
Financial assets include stock shares and bonds owned by an individual or company.
[12]
These may be reported on the individual or company balance sheet at cost or at market value.
Corporate book value
[
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]
A company or corporation's book value, as an asset held by a separate economic entity, is the company or corporation's
shareholders' equity
, 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
[
edit
]
A variation of book value,
tangible common equity
, has recently come into use by the U.S. federal government in the valuation of troubled banks.
[13]
[14]
Tangible common equity is calculated as total book value minus
intangible assets
,
goodwill
, and
preferred equity
, 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.
[15]
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
[
edit
]
To clearly distinguish the
market price
of shares from the core
ownership equity
or
shareholders' equity
, 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
of any asset and its accounting value which depends more on
historical cost
and
depreciation
. It may be used interchangeably with carrying value. While it can be used to refer to the business' total
equity
, 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
[
edit
]
- Book value is used in the
financial ratio
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.
[16]
Changes are caused by
[
edit
]
- 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
of options exercised.
New share issues and dilution
[
edit
]
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
.
Net book value of long term assets
[
edit
]
Book value is often used interchangeably with
net book value
or
carrying value
, which is the original acquisition cost less accumulated
depreciation
,
depletion
or
amortization
. 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
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]
References
[
edit
]
- ^
Angolia, John R. (c. 1991).
The HJ
. J.R. Bender.
ISBN
0912138440
.
OCLC
24306203
.
- ^
Hermanson, Roger H., James Don Edwards, R. F. Salmonson, (1987)
Accounting Principles
Volume II, Dow Jones-Irwin, p. 694.
ISBN
1-55623-035-4
- ^
Graham and Dodd's
Security Analysis
, Fifth Edition, pp 318 ? 319
- ^
Meigs and Meigs,
Financial Accounting
4th ed. p. 90.
- ^
Wolk, Harry I., James L. Dodd and Michael G. Tearney (2004).
Accounting Theory: Conceptual Issues in a Political and Economic Environment
, 6th ed. South-Western. pp. 330?331.
ISBN
0-324-18623-1
.
- ^
Meigs, p.91
- ^
Meigs, p.90
- ^
Meigs, p.105
- ^
Meigs, p. 313
- ^
Hermanson, Roger H., James Don Edwards, R. F. Salmonson, (1987)
Accounting Principles
Volume II, Dow Jones-Irwin, p. 657.
ISBN
1-55623-035-4
- ^
"SEC.gov ? Net Asset Value"
.
sec.gov
. Retrieved
9 April
2018
.
- ^
Groppelli, Angelico A. (2000)
Finance
, 4th ed., p.25.
- ^
"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 via Wikinvest
[
dead link
]
- ^
http://www.retailinvestor.org/earnings.html
Archived
2 April 2019 at the
Wayback Machine
Use Book Value To Calculate Comprehensive EPS