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Book Value


There are two main types of values that are used in finance:


Book value is a value that is recorded in the balance sheet of a company. Every asset of the company must have some book value that is in the balance sheet, however, some assets may have book value of zero if those are fully depreciated. There are few methods to determine the book value of an asset in the balance sheet. The basic method that is applied for most of the assets uses the acquisition price of the asset and depreciates it over time (depreciation rate depends on the type of the asset and accounting policy of the company). If this method is used, the difference between the book value and the market value can be very significant, and such ratios as price-to-book-value should be used very carefully. 


Other method which is also allowed by most of the accounting standards is revaluation method: company may choose to order the valuation of the assets, and use those values in balance sheet. Companies usually revaluate their assets if see an opportunity to increase depreciation which lowers corporate income tax. 



(2) Book value of equity is often also called as ‘book value’. Book value of equity which also can be named as ‘shareholders book value’ or ‘shareholders equity’ is equal to all the assets of the company less all liabilities, and can be found in the balance sheet. Book value of the equity can be used for many financial ratios but in real business practice book value can be very far from market value and cannot be the background for important financial decisions. However, book value of equity might be more significant for the companies of which assets are often replaced and are quite liquid, for example, financial institutions.

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