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In accounting, book value is the value of an asset according to its
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a busine ...
account balance. For assets, the value is based on the original cost of the asset less any
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
, amortization 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 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 economic value. Assets r ...
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 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 economic value. Assets r ...
s, or both.Graham and Dodd's ''Security Analysis'', Fifth Edition, pp 318 – 319 The value inherent in its workforce, part of the
intellectual capital Intellectual 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 relat ...
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 assets minus the value of its Liability (financial accounting), liabilities, often in relation to open-end fund, open-end, mutual fund, mutual funds, Hedge fund, hedge funds, and Venture capital, v ...
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 U.S. tax code.


Depreciable, amortizable and depletable assets

Monthly or annual
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
, 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. 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 accounts (both revenue and capital) contained in the ledger of a business. This list will contain the name of each nominal ledger account and the value of that nominal ledger balance. Each nomin ...
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 (accountancy), account ledgers to record changes in Value (economics), value resulting from business transactions. A debit entry in an account represents a transfer of v ...
. 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 voucher ...
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) 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 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'', "min ...
, 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 assets minus the value of its Liability (financial accounting), liabilities, often in relation to open-end fund, open-end, mutual fund, mutual funds, Hedge fund, hedge funds, and Venture capital, v ...
may refer to book value. A
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe ...
is an entity which primarily owns ''financial assets'' or
capital asset A capital asset is defined as 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 or int ...
s such as bonds, stocks and commercial paper. The
net asset value Net asset value (NAV) is the value of an entity's assets minus the value of its Liability (financial accounting), liabilities, often in relation to open-end fund, open-end, mutual fund, mutual funds, Hedge fund, hedge funds, and Venture capital, v ...
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, 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 economic value ...
, 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 equity, has recently come into use by the U.S. 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 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 economic value. Assets r ...
s, 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. 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 of payment or Financial compensation, compensation given by one Party (law), party to another in return for Good (economics), goods or Service (economics), services. In some situations, the pr ...
of shares from the core
ownership equity In finance, equity is ownership of assets that may have debts or other Liability (financial accounting), liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For exampl ...
or
shareholders' equity In finance, equity is ownership of asset In 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 economic value ...
, 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 of payment or Financial compensation, compensation given by one Party (law), party to another in return for Good (economics), goods or Service (economics), services. In some situations, the pr ...
of any asset and its accounting value which depends more on historical cost and
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
. 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

#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.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, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for exampl ...
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 Stock dilution, also known as equity dilution, is the decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new Equity (finance), equity. New equity increases the total shares outstanding which ha ...
.


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, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
, 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

*
Capital formation Capital formation is a concept used in macroeconomics, national accounts and financial economics. Occasionally it is also used in corporate accounts. It can be defined in three ways: *It is a specific statistical concept, also known as net invest ...
*
Fixed capital In accounting, fixed capital is any kind of real, physical asset that is used repeatedly in the production of a product. In economics, fixed capital is a type of capital good that as a real, physical asset is used as a means of production which i ...
*
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) i ...
*
Market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a Market (economics), competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market va ...
*
Shareholders' equity In finance, equity is ownership of asset In 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 economic value ...
*
Stock dilution Stock dilution, also known as equity dilution, is the decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new Equity (finance), equity. New equity increases the total shares outstanding which ha ...
* Tangible common equity


References

{{Authority control Fundamental analysis Asset Valuation (finance)