book value business definition

1. The net dollar value at which an asset is carried on a firm's balance sheet. For example, a building that was purchased for $900,000 but that has depreciated $200,000 has a book value of $700,000. Book value, an accounting concept, often bears little relation to an asset's market value. Also called carrying value, depreciated cost, net asset value, unrecovered cost, written-down value.
2. See book value per share.

Does the accounting book value of a company provide any useful information for a firm's owners or creditors?

The information that book value conveys depends on the attribute of the asset being reported. As noted in the definition of book value, firms report many assets on an adjusted historical cost basis. Generally accepted accounting principles require market-based disclosure of certain assets, such as debt and equity security investments.

Book-value disclosures for assets reported at (adjusted) historical cost provide a conservative estimate of the net cash flows the firm expects them to generate. Firms lower the book value of these assets whenever they estimate that future cash flows will be less than their current carrying amount. They do not increase book value, however, when they expect cash to exceed the current carrying value. Consequently, the book value of a historical-cost asset provides the minimum cash recoverability of that investment. Conversely, the book value of assets reported at market value equals their economic worth as of the balance-sheet date.

Financial reporting is moving toward reporting assets at market (fair) value because it contains more relevant information than historical cost-based disclosures. As evidenced by market-based asset disclosures during the 2006-2008 housing crisis, however, market values are fluid and sometimes difficult to determine. Proponents of historical-cost reporting argue that these disclosures are more reliable than volatile market prices.

Peter M. Bergevin, PhD, Professor of Accounting, School of Business, University of Redlands, Redlands, CA