The book value of an asset is an item's value after accounting for depreciation. The figure is used for tax purposes, rather than for determining how much someone could charge for the sale of an item.
Learn how to calculate the book value of an asset, how it helps businesses during tax season, and why it's less helpful for individuals who don't run a business.
What Is the Book Value of Assets?
The book value of an asset is the value of that asset on the "books" (the accounting books and the balance sheet) of a company. It's also known as the net book value. Businesses can use this calculation to determine how much depreciation costs they can write off on their taxes. Since book value is strictly an accounting and tax calculation, it may not always perfectly align with the fair market value of an asset.
Book value can be applied individually to an asset, or it can be broadly applied to an entire company. However, when applying the concept more broadly, the effect of depreciation may not apply to all assets. Additional factors like shareholder equity and debt may also have to be accounted for when assessing the book value of an entire company.
Book value is calculated on property assets that can be depreciated. Depreciable assets have lasting value, and they include items such as furniture, equipment, buildings, and other personal property.
Book value does not need to be calculated for more stable assets that aren't subject to depreciation, such as cash and land.
How Do You Calculate Book Value of Assets?
The calculation of book value for an asset is the original cost of the asset minus the accumulated depreciation, where accumulated depreciation is the average annual depreciation multiplied by the age of the asset in years.
How Book Value of Assets Works
A business should detail all of the information you need to calculate book value on its balance sheet.
After the initial purchase of an asset, there is no accumulated depreciation yet, so the book value is the cost. Then, as time goes on, the cost stays the same, but the accumulated depreciation increases, so the book value decreases.
The book value of assets is important for tax purposes because it quantifies the depreciation of those assets. Depreciation is an expense, which is shown in the business profit and loss statement. Depreciation effectively lowers profits, thereby reducing business taxes.
Assets can't depreciate in perpetuity. There are legal limits on how many years a company can write off depreciation costs. Those limits vary by asset category. If an asset is owned long enough, the book value may only represent salvage or scrap value. At that point, the asset is considered to be "off the books." That doesn't mean the asset must be scrapped or that the asset doesn't have value to the company. It just means that the asset has no value on the balance sheet—it has already maximized the potential tax benefits to the business.
Book Value on a Balance Sheet
A business's assets are listed on one side of the balance sheet. Assets that have book value are those that are depreciated. They are listed in order of liquidity (how quickly they can be turned into cash). The book value shown on the balance sheet is the book value for all assets in that specific category.
As an example, consider this hypothetical balance sheet for a company that tracks the book value of its property, plant, and equipment (it's common to group assets together like this). At the bottom, the total value accounts for depreciation to reveal the company's total book value of all of these assets. On a real balance sheet, this figure would then be combined with revenue, debt, and other factors to give a sense of the company's overall book value.
|Example of Asset Book Value on a Balance Sheet|
|Property, Plant, and Equipment|
|Less: Accumulated depreciation||($50,000)|
|Property, Plant, Equipment - NET||$525,000|
Limitations of Book Value of Assets
The major limitation of the formula for the book value of assets is that it only applies to business accountants. The formula doesn't help individuals who aren't involved in running a business.
You could certainly calculate the book value of a personal asset, like a car. However, this calculation would be somewhat pointless since only business assets offer tax benefits for depreciation. You can't use the depreciation of your personal car to reduce your annual taxable income—the government doesn't consider the two things related. Therefore, the calculation still works, but the resulting figure is meaningless.
- The book value of an asset is an accounting calculation that measures the impact of depreciation on an asset's value.
- Businesses use the book value of an asset to offset some of their profits, therefore reducing their taxes.
- The book value of an asset isn't helpful for individuals—while the formula still works, the tax benefits don't extend beyond business assets.