# How To Calculate Book Value

Carrying value is an accounting term used to account for the effect of depreciation on an asset.While small assets are held on the books at a cost, larger assets have to be depreciated over time.The asset is still held on the books at a cost, but another account is created to account for the accumulated depreciation.You can learn how to calculate book value by subtracting depreciation from the asset's cost.

### Step 1: Define what a book is.

The book value of an asset is the difference between the original purchase cost and the accumulated depreciation.Assets are listed in the general ledger at cost in accordance with the cost principle of accounting, which helps create consistency in reporting standards.Large assets like a piece of factory equipment can't be expected to hold this value over their life, so they are depreciated over time.The book value is determined by subtracting depreciation from the original cost.

### Step 2: Determine the cost of the asset.

You need to know what the asset's original cost was to calculate the book value.The price is usually paid for the asset.The asset's cost in the general ledger will be equal to this amount.

### Step 3: The accumulated depreciation is associated with the asset.

You need to know the total of the depreciation expenses to date on the asset after determining the cost.The general ledger has an account called Accumulated Depreciation.You may need to look up the depreciation schedule for the asset in question, as a separate depreciation account is not generally maintained for each asset.

### Step 4: There is an estimate of the salvaged value.

A measure of the remaining value of an asset is called the Salvage Value.The asset can either be scrapped or sold.If necessary, most machines can be sold for scrap.Depending on the asset and how often it is used, an asset's useful life can be as short as one year or as long as 30 years.A regulatory body like the IRS can decide on the value.The annual depreciation of an asset is determined by the value of the asset.Depreciation is an annual reduction in the difference between the asset's original cost and its salvaged value.An asset that costs \$12,000 can be salvaged for \$2,000 after 5 years.The annual depreciation is calculated from the difference between the cost and the salvaged value.The annual depreciation would be \$10,000/ 5 for each year of useful life, or \$2,000 using the straight-line method.

### Step 5: Determine which method to use.

The depreciation expense is the amount of the asset's value that is expensed each year.There are a number of ways that this can be calculated.Straight-line depreciation is the most common, but other methods, like declining balance depreciation and sum-of-the-years'-digits, are also used.The nature of the asset can affect the selection of method.The straight-line is used by accountants to keep depreciation expense simple.Declining balance and sum-of-the-years'-digits methods are used to calculate depreciation for assets that are most productive or useful at the beginning of their lives.Production machines can be depreciated in this manner because they can operate more cleanly at the beginning of their lives.For income tax calculations, depreciation is a business expense.

### Step 6: Straight-line depreciation can be used.

The same amount is expensed each period until the asset is fully depreciated.If a piece of equipment is purchased for \$10,000 and has an expected life of 10 years, the annual depreciation expense is 10%.

### Step 7: Declined depreciation balance can be used.

This method of depreciation expenses more at the beginning of the asset's life than at its beginning.The straight line percentage of depreciation is used to calculate this rate.Double-declining depreciation for an asset with a 10-year life is 20%.The new book value at the end of the accounting period would be 20% less than the previous one.In the first year of the asset's life, 20% is the depreciation expense.The first year-end book value would be used to calculate the depreciation expense in the second year.We would have a second year-end book value of \$6,400 for the asset if the depreciation expense was 20%.

### Step 8: You can use sum-of-the-years'-digits depreciation.

The method uses an equation that is similar in effect to declining depreciation balance, but is calculated differently.The style of depreciation is as follows.In the first year, it would be 5.The total of digits in the useful life of the asset is represented by the bottom fraction.Our asset has a useful life of five years and is worth \$1,000.The first year's depreciation expense would be between \$10,000 and\$1,000.The displaystyle is \$9,000(5/15) or \$9,000(1/3).The depreciation expense in the first year is \$3,000.

### Step 9: Determine the depreciation.

The asset's Accumulated Depreciation account has a balance.If you are interested in the account balance after 6 years, use the straight-line example above.The accumulated depreciation is \$6000 because a depreciation expense of \$1000 was recorded for each of those 6 years.The other methodsDepreciation is calculated by repeating the process for each year until the desired year is reached.

### Step 10: The asset's cost should be subtracted from the accumulated depreciation.

Simply subtract the depreciation from the cost to arrive at the book value.The asset's book value after 6 years would be between 10,000 and 6000.The book value of the asset can never dip below the salvage value even if the calculated expense is large enough to put it below this value.The asset's book value will remain at its salvaged value until it is sold, when it will drop to \$0.

### Step 11: Market value is different from book value.

The book value is not intended to be an accurate valuation of the asset.The percentage of the asset's cost that has been expensed is what the book value is meant to show.A willing buyer would pay a willing seller a market value.A piece of manufacturing equipment was purchased for \$10,000 and depreciation over 4 years was \$4,000.The book value has gone up.The market value for this type of equipment is only \$2,000 because new technology has replaced it.The market value of heavy machinery will be higher than the book value.Even though they are old and heavily depreciated, they still perform well.

### Step 12: Current Assets and Long-term Assets are different.

Current assets can turn into cash within a year.Long-term assets are a company's value of property, plant, and equipment that can be used for more than a year.The company's balance sheet shows the total account balance.Current assets are usually cash, supplies and accounts receivable, while long-term assets include land, office buildings and manufacturing equipment.

### Step 13: Check to see if a company is using their assets to make ends meet.

The value of assets should be reduced by secured loans if you are going to invest in the company.The difference between the book value and the stock price in the future would be made up by earnings.If a company takes out \$2 million in loans with some of its assets used for guarantees, the value of the company's total assets is only \$3 million.