Book Value vs. Carrying Value: An Overview
Companies own many assets and the value of these assets are derived through a company's balance sheet. There are a variety of ways to value an asset and record it, but the most common is taking the purchase price of the asset and subtracting its depreciation cost. This is known as the book value, or carrying value, of the asset.
For all intents and purposes, the two terms are interchangeable. The term book value is derived from the accounting practice of recording an asset's value based upon the original historical cost in the books minus depreciation. Carrying value looks at the value of an asset over its useful life; a calculation that involves depreciation.
Book value can refer to several different financial figures while carrying value is used in business accounting and is typically differentiated from market value. In most contexts, book value and carrying value describe the same accounting concepts. In these cases, their difference lies primarily within the types of companies that use each one.
- Companies must value their assets and record them on their financial statements.
- Book value and carrying value refer to the process of valuing an asset and both terms refer to the same calculation and are interchangeable.
- To arrive at book value or carrying value, one needs to subtract depreciation or amortization from the historical cost of an asset.
- Historical cost is always used as opposed to the market value of an asset even if the value of the asset has changed since it was purchased.
- Book value can also refer to the value of a company minus its intangible assets and liabilities.
When defining book value, it has a few possible definitions. However, most commonly, book value is the value of an asset as it appears on the balance sheet. This is calculated by subtracting the accumulated depreciation from the cost of the asset. It is an established accounting practice that an asset is held based on its original costs, even if the market value of the asset has changed considerably since its purchase.
Book value can also refer to the total net value of a company. Book value in this definition is determined as the net asset value of a company calculated as total assets minus intangible assets and liabilities.
This is an important investing figure and helps reveal whether stocks are under- or over-priced. A company's book value is determined by the difference between total assets and the sum of liabilities and intangible assets, such as patents.
When an asset is initially acquired, its carrying value is the original cost of its purchase. But as time goes on, an asset's value will change. The carrying value of an asset is based on the figures from a company's balance sheet. Both depreciation and amortization expenses can help recognize the decline in the value of an asset as the item is used over time.
If it is a physical asset, then depreciation is used against the asset's original cost. If the asset is an intangible asset, such as a patent, then amortization is used against the asset's original cost.
In either of the above two definitions, book value and carrying value are interchangeable. Their names derive from the fact that these are the values carried on a company's books, making them independent of current economic or financial considerations.
Book value is also used in one context in which it is not commonly synonymous with carrying value; the initial outlay for an investment asset. This is the price paid for a security or debt instrument, such as a stock or bond.
For example, when stocks are sold by an investor, capital gains are determined based on the selling price minus the book value. However, even this is sometimes referred to as carrying value, most likely because of the historical association between the two terms.