Book value in accounting usually refers to a valuation in the financial statements. Many accountants specifically relate the terminology to items in the asset area. The book value of one item for one firm may be different from the same item in another firm — it is an internal calculation for each business.
The book value of an asset is not the market value of the asset; rather, it is a computed amount presented in the balance sheet. It can be presented as a net number or in gross, showing historical asset costs less accumulated depreciation. For example, a firm purchased an equipment for $10,000 years ago. The accumulated depreciation associated with this asset is $9,000. The book value of the asset shown in the balance sheet is only $1,000 ($10,000 – $9,000). The book value of an asset can never be a negative amount. When accumulated depreciation equals the cost of the asset, the book value is zero and it stays that way with no further depreciation expense.
An asset is usually set up when the item is expensive and has a life longer than a year. Real estate, large equipment
Depreciation is calculated based on the cost of an asset less any possible salvage value. For example, a firm buys a piece of equipment for $35,000 with life and salvage value as
The accumulated depreciation account is a contra-asset account presented in the balance sheet as a deduction from assets. This account has a credit balance and accumulates depreciation
When an asset is sold or disposed of, both costs and accumulated depreciation are zeroed out in the books. If there is a book value, then a loss is recognized for this value. The journal entry is to debit accumulated depreciation, loss on disposal and to credit the asset account. If the item is sold, then a firm could have a gain or a loss in the transaction. When the item is sold for more than its book value, a gain is recognized; when it is sold for less than its book value, a loss is recognized in the firm’s accounting records.