The book value of an asset is the asset's cost minus the asset's accumulated depreciation. For example, in the general ledger account, Automobile, is the automobile's cost of $22,000. In the contra asset account, Accumulated Depreciation on Automobile, is a credit balance of $16,000. The net of those two amounts ($22,000 minus $16,000) is the book value or the carrying value of the automobile. In this example the $6,000 is the amount being reported on the company's books.
You should realize that this book value is not an indication of the market value of the automobile. The market value could be more than $6,000 or it could be less than $6,000. Also don't confuse the accounting book value with the "blue book" or "black book" amounts that are published and show values for automobiles.
The term book value is also used when referring to a company's liability, such as Bonds Payable. The book value of bonds would be the maturity value (or par value) in the general ledger account, Bonds Payable, minus any unamortized amount in the account, Discount on Bonds Payable, and minus any unamortized amount in the asset account Bond Issue Costs. If the bonds were issued at more than their face (or par or maturity) amount, the book value would be the balance in Bonds Payable plus the balance in Premium on Bonds Payable and minus any amount in the asset account, Bond Issue Costs.
Lastly, book value is used when referring to the total amount of stockholders' equity appearing on a corporation's balance sheet. Again, this book value is not an indication of the market value of the corporation. It simply indicates the amounts appearing on the books for the assets less the amounts appearing for the liabilities. A corporation can be far more valuable than the amount of its book value.
After working as an accountant, consultant, and university accounting instructor for more
than 25 years, Harold Averkamp formed AccountingCoach.com in 2003. His goal was to
share his knowledge and passion for teaching accounting and with people throughout the
world at a very low cost. Read More...