Book Value Definition with Example
Book Value Definition – The value at which an asset is carried on a balance sheet. The book value of a new asset is its purchase price, but that figure is reduced each year after providing for depreciation. So the asset’s book value at any point in time is its cost minus accumulated depreciation.
The price at which the asset is recorded in the Balance Sheet at the time of purchase is known as Book Value. However the value of the asset decreases with time as it involves the depreciation. So the book value is the value that appears on the Balance Sheet after providing for the accumulated depreciation.
Book Value = Historical Cost – Accumulated Depreciation
Here historical cost means the cost of the asset at the time of its purchase. One more important thing to note is that, as the accumulated depreciation increases, the book value of the asset decreases.
Example of Book Value
In order to understand book value definition, let’s discuss a simple example. A company purchases a machinery of Rs. 5,00,000 whose estimated life is 10 years. So the depreciation will be 50,000 for every year.
So, the book value for the first year = 5,00,000 – 50,000 = 4,50,000
B.V for the second year = 4,50,000 – 50,000 = 4,00,000 and so on.
Related Financial Terms of Book Value
- Depreciation Definition – Depreciation Method, Examples
- Dividend Definition – Types, Example and Importance
Importance of Book Value
It is an important factor for those investor who want to invest in a company. And it becomes more important if the stock price per share is less than the organisation’s value. This implies that even if company went bankrupt the investors still enjoy profit.
Secondly, it indicates the true value of the assets of the company. This value is obtained after subtracting the depreciation, hence a true value of asset is obtained.