Book value is a theoretical value of a asset or liability based on its recorded book entry value. It is the cost of the asset or liability at the time it was acquired, minus any depreciation or amortization that has been taken.

Formula:

Book value = Cost - Depreciation or Amortization

Example:

A company purchased a machine for $10,000 in 2020. The machine has a depreciation rate of 10% per year. After three years, the book value of the machine would be:

Book value = $10,000 - (10% x 3) = $9,000

Key points:

• Book value is a theoretical value, not a market value.
• The book value is used to track the cost basis of assets and liabilities.
• Depreciation and amortization reduce the book value of assets over time.
• The book value can be used to calculate the carrying cost of an asset or liability.
• The book value is not always accurate, as it does not account for changes in market prices or obsolescence.