Book Value: Definition, Formula & Examples

Instructor: Darlisha Oliver

Darlisha has a Master of Science degree in Accounting

An item's book value is the most accurate depiction of what it is currently worth. Most items lose value over time and are not worth their original value after they have been used. Let's take a look at book value and how it is calculated.

Book Value

Michael loves to buy new cars, and almost never drives the same car for more than two years. Currently, he has a 2014 sports car and wants to trade it in for a 2016 sports car. Michael paid $60,000 for his 2014 sports car when he originally purchased it. Upon arriving at the car dealership, Michael finds out that his car is only worth $40,000. This $20,000 decline in value is referred to as accumulated depreciation. The book value of an item is equal to its cost minus accumulated depreciation.

Depreciation and Accumulated Depreciation

Depreciation is defined as the periodic decline in value an item experiences after it has been put to use. Depreciation is normally calculated on a yearly basis. However, some companies calculate depreciation every month. The period of time used to calculate depreciation depends on how often the company prepares its financial statements. For example, if a company prepares its balance sheet and other financial statements at the end of every month, depreciation is calculated on a monthly basis. Accumulated depreciation is the total decline in value over the entire time the item has been used. In Michael's case, the accumulated depreciation on his 2014 sports car is $20,000.

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