Net Book Value is the value at which a company reports an asset on its balance sheet. The net book value of an asset is not usually equal to its market value. Instead, it shows the value of the asset after accumulated depreciation has been deducted. This is because assets naturally lose some of their value over time, so it is important that this is reflected within the calculation. Net book value is one of the most common financial measures and can be used in regards to the value of an asset, liability or equity item.
What is the importance of net book value?
Net book value is an important figure for a company to know. By factoring in depreciation, a company will have a fairer and more accurate accounting record, and gain a proper approximation of an asset’s total value. Every asset has a period during which it's considered useful. For example, a piece of machinery will have a useful lifespan, until it's not worth keeping. For this reason, the net book value of an asset should decrease steadily over the asset’s useful lifespan — helping companies to understand the true, conservative value of their assets.
Net book value can be used by both company directors and investors to determine an asset and a company’s financial worth. It is also an important factor to consider when a company considers buying another, as they can clearly see whether the depreciation is worth the actual cost.
How is net book value calculated?
Net book value is calculated by taking a company's original asset cost and subtracting the accumulated depreciation expense to date. A simple formula can be used, which is as follows:
Net book value = original asset cost - accumulated depreciation
- The original asset cost includes the original purchase price of the asset, along with any extra costs, such as delivery fees, set-up fees and customs duties.
- The accumulated depreciation is the depreciation expense per year multiplied by the number of years.
What are some examples of net book value?
Let's say a trucking company has bought a truck for £100,000 that has depreciated £7,000 every year for five years. To work out the truck's net book value, you calculate the accumulated depreciation (£7,000 multiplied by five) and subtract this from the original asset cost.
Accumulated depreciation = £7,000 x 5 = £35,000
Net book value= £100,000 - £35,000 = £65,000
The net book value of the truck will be £65,000 in five years.