What is book value?
Book value (definition)
Book value is an accounting term used for both a measure of a business’s equity and the value of an asset as it appears on a balance sheet.
In the case of a business, book value is usually calculated as part of a sale, investment decision or liquidation of the business. The book value is what the business’s shareholders would theoretically get if the company was liquidated. And if the book value is compared with the market value of the company it can indicate if the business is under- or overpriced, which is of interest to buyers or investors.
Book value is not the same as market value. Market value is what similar businesses or assets are selling for and can be influenced by many external factors such as supply and demand, and what people are willing to pay.
In the case of assets, the book value is what appears on the balance sheet after depreciation of a tangible asset like equipment or amortisation of an intangible asset like a trademark.
How to calculate book value of a company
For a company, a simple book value is calculated by subtracting total liabilities from total assets. This may also be called net worth or book value of equity. More detailed book values take other factors into account, such as also deducting intangible assets.
For example, Joe’s Plumbing Ltd has £2 million in assets and £500,000 in liabilities. The company’s book value is £2 million – £500,000 = £1.5 million.
Learn more in our guide How to value a company.
How to calculate book value of assets
For a tangible asset, the book value is calculated by subtracting depreciation from its original cost. If there have been any additional improvements to the asset, the cost of those may be added to its original cost.
For example, The Cake Company bought a box-making machine for £11,000. After five years, the machine has depreciated at a rate of £1000 per year (using straight line depreciation). Its book value is now £6000.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.