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What is book value?
The book value of an asset is its cost plus the amount it has appreciated, or minus the amount it has depreciated. Almost anything can have a book value, including corporations, automobiles, coins, old baseball cards, rare books, and collectibles of all kinds. Anything that can be sold has a value, and it can pay to know the book value of your assets.
It helps to understand the difference between book value and market value.
Market value is the price you could get for it by selling it on the open market. There is almost always a disparity between book value and market value. The foundation of book value is an asset’s historical cost, while the basis of market value is the supply and demand for that asset.
For example, say you bought a 1958 Ford Edsel, a classic car with a loyal following. You paid $12,000 for the car and spent two years restoring it to its original glory. Shortly after you finished your restoration project, “60 Minutes” runs a story on the Edsel, which was named after Henry Ford’s son. Suddenly, the price of Edsels, particularly refinished ones, rises. The book value of your Edsel is the amount you paid for it and the sudden appreciation it enjoys, but the market value is whatever the market will bear.
It can be difficult to place an accurate value on any asset when the gap between book value and market value is wide. An appraisal can help adjust book value and give you a truer sense of market value.
Book value example
Market value can be emotionally driven. When six parties are bidding on the same piece of real estate, it can become a matter of needing to win, rather than making a good business decision. The benefit of book value is that there’s little or no subjectivity involved. It is a simple mathematical equation. You buy an asset, and the first entry on the balance sheet is the cost you paid. As the asset gets used over time it depreciates and that depreciation is subtracted from the cost of the asset. At any given time, you can get a pretty good idea of what your asset is worth.
Intangibles, like intellectual property, cannot be properly valued. For example, if you bought a small biofuel company for $2 million but came up with a more efficient way to turn corn husks into fuel, then that innovation would not show in the company’s book value until it is monetized. It may take years to work on your idea and see it to fruition, but your intellectual property sets you apart from other small biofuel companies. There is no way to include that in book value.
A personal loan can help you buy that collectible you’ve been eyeing. Use our personal loan calculator to figure what your monthly payments would be.