The term book value is derived from the accounting practice of recording asset value based upon the original historical cost in the books. 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.
Understanding Book Value vs. Carrying Value
When defining book value, it has three possible definitions. 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. Measuring book value is figured as the net asset value of a company calculated as total assets minus intangible assets and liabilities.
Book value can also refer to the total net value of a company. 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.
What Are the Main Purposes of Book Value?
Book value has two main purposes. It serves as the total value of the company's assets that shareholders would theoretically receive if a company was liquidated. Also, when compared to the company's market value, book value can indicate whether a stock is under- or overpriced.
There are restrictions as to how closely book value can be a proxy to the market value of a company without mark-to-market valuation being applied to assets that may experience increases or decreases of their market values. 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.
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.