Book Value

The book value of a fixed asset is the historic acquisition cost of the asset minus accumulated depreciation and write-offs. It may also be referred to as the carrying value, because it is the value carried on the books of an organization at any point in time. Depreciation is based on allocating the cost of the asset over a period of time, usually considered the asset's useful life. This depreciation is accumulated over the asset's life and then deducted from the original asset cost to produce the book value. Book value does not represent the earning capacity of the asset, nor does it associate any potential risks surrounding the asset. There is no true relationship between the book value and the market value of a fixed asset. Market value is the price as determined dynamically by buyers and sellers in an open market.

For example, let's assume that ABC Medical Center purchased a magnetic resonance imaging (MRI) machine in 2000 for $1,000,000. The MRI machine is assumed to have a useful life of 10 years. In addition, the machine is assumed to have a salvage value of approximately $100,000. The salvage value is the expected value of the asset at the end of its useful life. The depreciable basis of the machine is the original cost ($1,000,000) less the salvage value ($100,000), or $900,000. The annual depreciation on the MRI machine is calculated by dividing the depreciable basis of $900,000 by the estimated useful life of 10 years. Thus ABC would record $90,000 per year as depreciation on the machine.

Based on this information, the book value of the MRI machine after three full years of service is

Book value is important in determining the gain or loss associated with the disposal of an asset. On the sale of an asset, the book value is compared with the sales price. If the sales price is equal to the book value, then no gain or loss is experienced for financial statement purposes. If the sales price is greater than the book value, the difference in the two values is considered as a gain. If the sales price is less than the book value, the difference in the two values is considered a loss. The book value for income tax purposes may differ from that for financial statement purposes, because of different depreciation methods. In that case, gains or losses for tax purposes also differ.