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.

Asset

An asset is usually set up when the item is expensive and has a life longer than a year. Real estate, large equipment and major improvements are examples of items found as assets for a firm. Instead of being expensed at once, they are capitalized and expensed little by little. Fixed assets of a firm are recognized at historical value and values do not change in the books. If a machine was purchased for $20,000, this value stays in the books even if the machine may have appreciated or depreciated in value. Accounting allows for depreciation of the asset, but the accounts used for that process are different from the asset account originally used.

Depreciation

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 scrap of $5,000. Depreciation is calculated on $30,000. Depreciation expense calculations must use an accepted methodology, such as straight line, which allows for the same amount to be expensed each period. For instance, in the example of the $35,000 equipment, if we assume a life of 10 years and the asset purchased in January, then annual depreciation under the straight line method would be $3,000 per year for 10 years. After 10 years, no depreciation is recognized.

Accumulated Depreciation

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 through out the years. As an item is depreciated, the accumulated depreciation account increases, decreasing book value. For example, a business purchased an equipment for $10,000 and currently has $3,000 as a balance in its accumulated depreciation account — the book value of this equipment is $7,000 ($10,000 – $3,000). This year, the depreciation expense will be $1,000, increasing the accumulated depreciation to $4,000 — the book value of the equipment will be $6,000 ($10,000 – $4,000). The decrease in book value is directly related to depreciation expense.

Asset Disposal

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.

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