Definition: Book value or carrying value is the net worth of an asset that is recorded on the balance sheet. Book value is calculated by subtracting any accumulated depreciation from an asset’s purchase price or historical cost.
What Does Book Value Mean?
Essentially, an assets book value is the current value of the asset with respect to the asset’s useful life. In other words, the book value adjusts the historical cost of an asset by the accumulated depreciation.
Every year as depreciation is booked for an asset, the accumulated depreciation account is credited. As the accumulated depreciation account increases, the book value of the corresponding asset decreases.
Take a vehicle for example. A company purchases a vehicle for $5,000. Management determines that the vehicle has an estimated five-year useful life. That means this vehicle will be depreciated $1,000 each year. At the end of every year, the company will make this depreciation journal entry.
As the accumulated depreciation account increases, the book value of the asset decreases because part of the asset’s useful life is used up and gone. At the end of year one, the asset’s book value would be $4,000 calculated like this.
Since the asset has 1/5 of its useful life used up, the asset is worth 1/5 less than its original purchase price. This is GAAP’s way of showing change in value over time. Obviously, this doesn’t always reflect the fair market value of the asset. A car for instance, loses about half of its value as soon as you drive it off the car lot.