Business, Legal & Accounting Glossary
The book value of an asset or group of assets is the price at which they were originally acquired, in many cases equal to purchase price. The value of an asset as entered in a company’s balance sheet or an organisation’s accounts. Applied to the whole company it means its net assets. One way of valuing a bank, for instance, is to look at its book value and, if it is quoted, to compare that with its market value.
n. a determination of the value of a corporation’s stock by adding up the stated value of corporate assets as shown on the books (records) of a corporation and deducting all the liabilities (debts) of the corporation. This may not be the true value of the corporation or its shares since the assets may be under- or over-valued.
Book value has two accounting meanings. Book value is the value of an asset on a balance sheet, which is the cost of the asset minus accumulated depreciation. Book value also means the net asset value of a company. This book value is calculated by adding all the assets of a firm and subtracting intangible assets and liabilities. A value investor compares a company’s book value to its market capitalization to determine whether its stock is undervalued. A growth investor tends to believe a company is more valuable than its book value suggests, given the expectation of growing profits. Capital-intensive industries usually have higher book value than high-tech industries. Corporate raiders in the 1980s scrutinized book value in numerous U.S. companies. They found companies whose market capitalization was lower than their book value, then purchased shares of stock in those companies. When they gained a controlling share, the raiders frequently sold off the assets of the companies they took over.
The value of a security or asset as entered in a firm’s books.
The book value of an asset or group of assets is the price at which they were originally acquired, in many cases equal to purchase price. Book value is therefore relevant in-so-far as it forms the basis of various calculations.
e.g. of nominal capital gains (current value divided by book value), of amortised value (book value adjusted for depreciation) and of several financial ratios (e.g. price to book value [P/BV]).
In accounting, book value or carrying value is the value of an asset or liability according to its balance sheet account balance. Book value is the value carried on the bookkeeping records of an economic entity such as an individual, corporation, government, or other organization. Depending on the circumstances, assets and liabilities may be valued on a balance sheet at actual value (cash and cash equivalents), acquisition cost, depreciated value, amortized value, depleted value, or market value.
In the fundamental analysis of stock share values, the book value of an entire company is its shareholders’ equity. Shareholders’ equity is the company’s assets minus its liabilities. If a company’s shareholders’ equity is $100,000, the book value of the company is $100,000. If the company has 1,000 shares outstanding, each share has a book value of $100.
In the United Kingdom, the term net asset value may refer to 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 170 of the US tax code.
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. 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.
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.
Sample general journal entry for depreciation
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 contra account Discount on Bonds Payable is debited for the difference between the amount of cash received and the face value of the bonds.
In the United Kingdom, the term net asset value may refer 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. 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.
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.
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:
Bookvalue/share, beginning of year – Dividends + Sh issue Premium + Comprehensive EPS = Bookvalue/share, end of year
Changes are caused by:
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.
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.
Liabilities are recorded at book value so that the book value of net worth is zero.
The insured value of the sports car was greater than its book value.
Stocks are selling at more than three times their book value.
An organisations capitalised value may be greater or less than its book value.
According to the MSCI, World financials currently trade at 1.2 times x book value.
We have to assume that the owners of those enterprises acquired them at book value.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
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This glossary post was last updated: 26th April, 2020 | 7 Views.