Net Book Value
Meaning and Definition of Net Book Value
The net book value can be defined in simple words as the net value of an asset. To define net book value, it can be rightly stated that it is the value at which the assets of a company are carried on its balance sheet.
How is Net Book Value Calculated?
The net book value of an asset is calculated by deducting the depreciation and amortization of an asset from its original cost.
Formula for Net Book Value
Net Book Value = Cost of the Asset – Accumulated Depreciation
Significance of Net Book Value
The net book value is one of the most known financial measures, specifically when it comes to valuing companies. Besides, it can also be used with regards to a particular asset, or even to an entire company.
Moreover, it is also noteworthy that the net book value will never be equivalent to the market value. This is due to various reasons like:
- The assets are listed on the balance sheet at cost. In other words, the balance sheet value of assets is not updated with changes in prices. A company holding a lot of real estate on its balance sheet might probably have a net book value far lesser than its market value.
- The companies have tact over how slowly or how quickly the depreciation is recorded. If accelerated depreciation is being used by the company, the market value of asset will exceed the asset’s book value in the beginning years of the asset’s useful life.
Let us take the example of Company ABC which purchased a Mega Widget for $100,000 three years back. This Mega Widget depreciates every year by $10,000. The net book value of this Mega Widget, therefore, is:
$100,000 - $10,000 (year 1 depreciation) - $10,000 (year 2 depreciation) - $10,000 (year 3 depreciation) = $70,000.
Net book value is, therefore, an amount which reflects the value of fixed asset placed on the balance sheet and is calculated as a difference between the cost of the asset and the accumulated depreciation for the same.