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From Wikipedia, the free encyclopedia Jump to: navigation, search In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities.[1][2] However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both.[3] When intangible assets and goodwill are explicitly excluded, the metric is often specified to be "tangible book value".[4] In the United Kingdom, the term net asset value may refer to the book value of a company.[5]
Contents
1 Asset book value o 1.1 Depreciable, amortizable and depletable assets 2 Net asset value 3 Corporate book value 4 Tangible Common Equity 5 Stock pricing book value o 5.1 Uses o 5.2 Changes are caused by o 5.3 New share issues and dilution o 5.4 Net book value of long term assets 6 References 7 See also
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.[6] 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.[7] 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.[8] Sample general journal entry for depreciation[9]
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.[10] 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.[11] 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.[12]
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
1. 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. 2. 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.[19]