To run your business, you likely rely on assets such as equipment, your building, a company car, inventory, and cash. And if you want to maintain your books, create financial statements, and determine the theoretical value of your property, you need to calculate book value. What is book value?
What is book value?
Book value, also called carrying value or net book value, is an asset’s original cost minus its depreciation. An asset’s original cost goes beyond the ticket price of the item—original cost includes an asset’s purchase price and the cost of setting it up (e.g., transportation and installation). Depreciation is the decrease of an asset’s value due to general wear and tear.
You can also find the book value of a company by subtracting intangible assets (non-physical items of value) and liabilities from total assets. Calculating the book value of your small business shows you how much your company would be worth if you were to liquidate your assets.
An asset’s book value is its theoretical value, not the amount it would sell for in the current market. If you want to know how much an asset would sell for, you must calculate its fair market value. Book value can be higher, lower, or equal to an asset’s fair market value.
Generally, you cannot find the absolute book value of your intangible assets like intellectual property and your business’s reputation. Use book value to find the worth of your tangible assets.
The purpose of calculating book value
Why should you calculate the book value of your assets or small business?
If you are seeking outside financing, you may need to calculate the book value of your assets and business. Investors and lenders need to know the worth of your property before they invest or lend you money.
Shareholders may also want to know how much they would receive if you were to liquidate an asset or all your assets. If you structure your business as a corporation, you might need to find the book value for your shareholders.
You might also find the book value of an asset you want to sell. To determine an asset’s fair market value, you need to know its original cost and consider its book value.
Another reason you may want to find an asset’s book value is to compare it to its fair market value. By comparing book value vs. market value, you can determine if an asset is over- or underpriced on the market.
How to calculate book value (book value formula)
How do you calculate book value? The formula you use depends on whether you are trying to find an asset’s carrying value or your small business’s book value.
Asset book value
Here is the book value formula for an individual asset:
Book Value = Asset’s Original Cost – Depreciation
Let’s say you bought a car. Its original cost was $20,000, and depreciation expenses equal $5,000. The book value of your car would be $15,000 ($20,000 – $5,000).
Small business book value
And, here is the formula for calculating the book value of a company:
Company’s Book Value: Assets – Intangible Assets – Liabilities
The book value of your business is also known as equity, which is on the small business balance sheet.
Let’s say you have assets totaling $100,000. Of the $100,000 in assets, your intangible assets are worth $20,000. And, you have $60,000 of liabilities. Your business’s book value would be $20,000 ($100,000 – $20,000 – $60,000).
Recording book value
You are also responsible for recording an asset’s book value in your books and financial statements.
When you first purchase an asset, you record its value in your accounting books. And, you should create an annual journal entry for its depreciation expense.
You must record an asset’s value loss in your books, too. If an asset’s book value is lower than its fair market value, you have asset impairment. You must update your records by creating an impaired asset journal entry.
Unlike fair market value, you need to record book value on your small business balance sheet. The balance sheet lists assets and depreciation. And, your business’s book value is the same as the equity listed on your balance sheet.
If you run your own business, you need to track your assets. Patriot’s online accounting software makes it easy to manage your books. And, we offer free, USA-based support. Get your free trial now!
This article has been updated from its original publication date of October 30, 2018.
This is not intended as legal advice; for more information, please click here.