What is Net Book Value?

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The Net Book Value refers to the net value or the carrying value of a company’s assets according to an accountant’s records on its balance sheet. 

 

Book Value vs. Market Value

There are two most commonly used quantitative measures for valuing a company: the Book Value and the Market Value.

The Book Value is the total value of a company’s assets as found in a company’s balance sheet. This also represents the value of all a company’s assets if liquidated.

 

The Market Value, on the other hand, refers to a company’s value based on the total value of its outstanding shares in the market or its market capitalization. This is greater than a company’s Book Value because the Market Value also captures non-tangibles and future growth prospects.

 

Why is Net Book Value important?

 

The Net Book Value is an important reference of a company’s value for accounting records, possible liquidation, or if another company is planning on taking over the business. 

 

Calculating the Net Book Value 

 

It is a reality that assets lose some of their value over time. In order to calculate the Net Book Value, the depreciation and amortisation of an asset should be subtracted from its original cost. This is why the Net Book Value should steadily decrease throughout the asset’s useful life. 

 

The Net Book Value is calculated using this formula:

 

Net Book Value = Original Asset Cost – Accumulated Depreciation

 

The Original Asset Cost refers to the asset’s purchase price that the company paid at the time of its purchase. 

 

The Accumulated Depreciation refers to the total depreciation charged or accumulated by the company on its assets until the date of the calculation of the asset’s Net Book Value.

 

To illustrate, let us take a look at this example. A food company purchased machinery on January 1, 2010 worth £800,000 with a useful life of 20 years. We will be needing to calculate the asset’s Net Book Value for the financial year ending on December 1, 2019.

 

First, we have to get the Accumulated Depreciation of the asset using the straight-line depreciation method. This method is one of the most popular methods of depreciation as the asset is assumed to uniformly depreciate over the course of its useful life and the asset’s cost is evenly spread over its useful life. 

 

The straight-line depreciation method is done by dividing the purchase price of the asset by its useful life. Therefore:

 

£800,000 / 20 = £40,000 (Per Year Depreciation)

 

The next step is for us to calculate the asset’s Accumulated Depreciation charged until the financial year ending on December 1, 2019 for 9 years. Therefore,

 

Accumulated Depreciation = Per Year Depreciation × Number of Years

        = £40,000 × 9

        = £360,000 

 

Now, we can finally calculate the asset’s Net Book Value using the formula mentioned above.

 

Net Book Value = Original Asset Cost – Accumulated Depreciation

  = £800,000 – £360,000

Net Book Value = £440,000

 

The machinery’s Net Book Value by December 1, 2019 is at £440,000.

 

It can be confusing to dive into the nitty gritty details of your business, but it is of utmost important that you get even just a bird’s eye view of your finances. Make sure you work with a credible finance advisor and accounting team for your company. 0

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Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.