Definition: Net book value (NBV) represents the carrying value of assets reported on the balance sheet, and is calculated by subtracting accumulated depreciation from the original purchase cost of the asset.
What Does Net Book Value Mean?
What is the definition of net book value? The NPV of an asset is essentially how much the asset is worth at a moment in time. As organizations capitalize the original purchase cost of assets, they begin to depreciate them over the estimated useful life of each asset. With each depreciation period, the accumulated depreciation associated with each asset increases, and reduces the NBV of the asset carried on the balance sheet. If the asset is damaged or sold and the organization is required to write-off or dispose of the asset, the NBV of the asset would be used to determine the impact to the financial statements.
Let’s look at an example.
Example
Let’s assume a manufacturing company purchased a significant piece of equipment to be used in its operations. The machine cost the company $600,000 and has an estimated useful life of 10 years. The company calculates depreciation monthly and depreciates assets using the straight-line method of depreciation. If the machine was capitalized and put into use on January 1, 2016, what is the NBV of the machine as of 12/31/2016?
Original Purchase Cost = $600,000
Accumulated Depreciation as of 12/31/2016 = – $60,000
Net Book Value = $540,000
In this example, the accumulated depreciation was calculated by determining the depreciation amount per month, and multiplying it by the number of months the asset was in use as of 12/31/2016: $5,000 per month ($600,000 ÷ (120 months)) multiplied by the 12 months the asset was in use during 2016 ($5,000 × 12 months).
Summary Definition
Define Net Book Value: NPV means the carrying value of an asset derived by reducing the purchase cost by the accumulated depreciation.
