book value

Suppose you bought a 30,000 car three years ago and, on paper, you have 'used up' 18,000 of it through depreciation. What value does the car carry on your records now? Simple: 30,000 minus 18,000, which is 12,000. That 12,000 is not necessarily what you could sell it for — it is just what is left of the cost on your books after subtracting the wear you have already charged. That leftover figure is book value.

Book value (also called carrying value or net book value) is an asset's recorded cost minus its accumulated depreciation (or accumulated amortization or depletion, for other asset types). For a single asset: book value = cost − accumulated depreciation. So a building bought for 500,000 with 120,000 of accumulated depreciation has a book value of 380,000. It is the net amount at which the asset is carried on the balance sheet, and it falls year by year as depreciation piles up, until it reaches the asset's salvage value (where depreciation stops). The same idea scales up to a whole company: the book value of equity is total assets minus total liabilities.

Book value matters because it is the number that flows through to the balance sheet and into many calculations — including the gain or loss when an asset is sold (compare sale price to book value). But its biggest pitfall is being mistaken for market value. Book value is an accounting leftover based on historical cost and depreciation estimates; it can be far above or below what the asset would actually fetch. A fully depreciated machine has a book value of zero (or its salvage value) yet may still work and sell for real money — proof that book value is a record of cost consumed, not a current appraisal.