Book Value
Book value is the net value of an asset or a company as recorded on the balance sheet. For an individual asset, it's the original cost minus accumulated depreciation. For a company, it's total assets minus total liabilities — essentially what shareholders would receive if the business liquidated eve
Book Value Definition
Book value is the net value of an asset or a company as recorded on the balance sheet. For an individual asset, it's the original cost minus accumulated depreciation. For a company, it's total assets minus total liabilities — essentially what shareholders would receive if the business liquidated everything and paid all debts. It's the accounting value, not necessarily the market value.
Book Value in Practice — Example
Riley bought a commercial pizza oven for her restaurant for $25,000 three years ago. The oven depreciates over 10 years using straight-line depreciation ($2,500/year). After three years, accumulated depreciation is $7,500, so the book value is $17,500. If Riley wanted to sell the restaurant, the oven would be listed on her balance sheet at $17,500 — though it might sell for more or less than that on the open market.
Why Book Value Matters for Your Business
Book value is the conservative measure of what your business is worth. When you apply for a loan using assets as collateral, lenders often look at book value to determine how much they'll lend against it. If your equipment has a book value of $100,000, a lender might offer 70–80% of that as collateral value.
For buying or selling a business, book value is the starting point of valuation. Most businesses sell for more than book value (because they have earning potential, customer relationships, and brand value not captured on the balance sheet), but book value sets the floor. A business selling below book value is a red flag.
Understanding book value also helps you make smarter decisions about replacing versus repairing assets. If an asset's book value is near zero but it still functions, replacing it might trigger a tax write-off while upgrading your operations.
How Book Value Works
Asset book value: Original Cost – Accumulated Depreciation = Book Value
Company book value: Total Assets – Total Liabilities = Book Value (also called shareholders' equity or net asset value)
| Asset | Original Cost | Depreciation (3 yrs) | Book Value |
|---|---|---|---|
| Delivery Van | $35,000 | $15,000 | $20,000 |
| Office Equipment | $8,000 | $4,800 | $3,200 |
| Software | $6,000 | $4,000 | $2,000 |
| Total | $49,000 | $23,800 | $25,200 |
Book Value vs Market Value
Book value is what accounting says an asset is worth; market value is what someone would actually pay for it. A building purchased for $200,000 might have a book value of $150,000 (after depreciation) but a market value of $350,000 (because real estate appreciated). For businesses, market value almost always exceeds book value due to intangible factors like brand, customer base, and future earnings potential.
FAQ
Q: Can book value be negative?
A: For a company, yes — it means liabilities exceed assets. For an individual asset, book value can reach zero (fully depreciated) but not go negative.
Q: Is a high book value good?
A: Generally yes — it means your business has significant net assets. But context matters. A high book value with low earnings could mean your assets aren't being used efficiently. Compare book value to revenue and earnings for a fuller picture.
Related Terms
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Related Terms
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