Net Book Value
Net Book Value, also known as carrying value or book value, is the value of an asset according to a company’s balance sheet, calculated by subtracting accumulated depreciation from the asset’s original cost.
For tangible assets like machinery, vehicles, or buildings, the calculation would look like this:
Net Book Value = Original Cost of the Asset – Accumulated Depreciation
The original cost of the asset is the purchase price the company paid for the asset. Accumulated depreciation is the total depreciation that has been taken on the asset from the time it was put into use until the present time. Depreciation reflects the wear and tear on the asset over time and the consequent loss in its value.
For intangible assets like patents or copyrights, amortization (which is similar to depreciation but used for intangible assets) is used instead:
Net Book Value = Original Cost of the Asset – Accumulated Amortization
Net Book Value provides a useful measure of the value of an asset as recorded in the company’s books. However, it may not reflect the current market value of the asset, which could be higher or lower depending on various factors.
Example of Net Book Value
Suppose a company purchases a machine for its production line at a cost of $20,000. This machine has a useful life of 10 years, after which it is expected to have no resale or scrap value. Using the straight-line method of depreciation, the machine will depreciate by $2,000 each year ($20,000 divided by 10 years).
After 3 years, the accumulated depreciation on the machine will be $6,000 (3 years times $2,000 per year). The net book value of the machine at this time will be:
Net Book Value = Original Cost of the Asset – Accumulated Depreciation
Net Book Value = $20,000 – $6,000 = $14,000
So, according to the company’s books, the machine is worth $14,000 after 3 years.
Remember, this is the book value of the machine, not necessarily its market value. The machine might sell for more or less than $14,000 on the open market, depending on factors like its condition and demand for such machines.
