Book Value vs. Carrying Value: What’s the Difference?

Book Value vs. Carrying Value: An Overview

Companies own many assets and the value of these assets are derived through a company’s balance sheet. There are a variety of ways to value an asset and record it, but the most common is taking the purchase price of the asset and subtracting its depreciation cost. This is known as the book value, or carrying value, of the asset.

For all intents and purposes, the two terms are interchangeable. The term book value is derived from the accounting practice of recording an asset’s value based upon the original historical cost in the books minus depreciation. Carrying value looks at the value of an asset over its useful life; a calculation that involves depreciation.

Book value can refer to several different financial figures while carrying value is used in business accounting and is typically differentiated from market value. In most contexts, book value and carrying value describe the same accounting concepts. In these cases, their difference lies primarily within the types of companies that use each one.

Key Takeaways

• Book value generally refers to the recorded value of an asset on a company’s balance sheet, calculated by subtracting depreciation from the asset’s original cost.
• It also represents a company’s net value, determined by total assets minus total liabilities; this is used in stock valuation.
• Carrying value reflects the asset’s value over time, adjusted for depreciation or amortization.
• The terms are often interchangeable but differ in some contexts.

Book Value

When defining book value, it has a few possible definitions. However, most commonly, book value is the value of an asset as it appears on the balance sheet. This is calculated by subtracting the accumulated depreciation from the cost of the asset. It is an established accounting practice that an asset is held based on its original costs, even if the market value of the asset has changed considerably since its purchase.

Book value can also refer to the total net value of a company. Book value in this definition is determined as the net asset value of a company calculated as total assets minus intangible assets and liabilities.

This is an important investing figure and helps reveal whether stocks are under- or over-priced. A company’s book value is determined by the difference between total assets and the sum of liabilities and intangible assets, such as patents.

Important

Book value and carrying value can sometimes be misleading indicators of an asset’s actual market value if the calculation hasn’t been adjusted for changes in the asset’s condition or market fluctuations.

Carrying Value

When an asset is initially acquired, its carrying value is the original cost of its purchase. But as time goes on, an asset’s value will change. The carrying value of an asset is based on the figures from a company’s balance sheet. Both depreciation and amortization expenses can help recognize the decline in the value of an asset as the item is used over time.

If it is a physical asset, then depreciation is used against the asset’s original cost. If the asset is an intangible asset, such as a patent, then amortization is used against the asset’s original cost.

Special Considerations

In either of the above two definitions, book value and carrying value are interchangeable. Their names derive from the fact that these are the values carried on a company’s books, making them independent of current economic or financial considerations.

Book value is also used in one context in which it is not commonly synonymous with carrying value; the initial outlay for an investment asset. This is the price paid for a security or debt instrument, such as a stock or bond.

For example, when stocks are sold by an investor, capital gains are determined based on the selling price minus the book value. However, even this is sometimes referred to as carrying value, most likely because of the historical association between the two terms.

What Is Face Value vs. Book Value?

Face value is the nominal value of a security, such as a bond, as determined by the issuer. For a bond, it represents the amount to be paid to the investor at maturity. Book value is the net value of a company, calculated as total assets minus total liabilities. Face value is generally always a fixed number while book value changes as the company’s performance changes.

What Is an Example of Carrying Value?

Carrying value is the value of an asset as recorded on a balance sheet. It takes the original cost of the asset and subtracts depreciation or amortization. For example, if a company purchases a machine for $10,000 and it depreciates by $1,000 each year, the carrying value after four years would be $6,000 ($10,000 original cost – $4,000 depreciation = $6,000 carrying value).

Is Book Value a Good Indicator?

Yes, book value can be a good indicator of a company’s financial health. As with all financial metrics, its usefulness depends on how it is used. Book value is often well-suited to companies that are asset-heavy, like manufacturing or retail, as the calculation values a company’s net worth based on its balance sheet (total assets – total liabilities). Book value, however, doesn’t take into consideration intangible assets (depending on the calculation), market sentiment, or growth potential, so it is often not as useful for technology companies, service businesses, or startups.

The Bottom Line

Both book value and carrying value represent the value of assets as noted on a company’s balance sheet. They are calculated by subtracting depreciation or amortization from the original cost of the asset, relying on historical costs for asset valuation.

Both terms are often used interchangeably and have the same basic accounting, though their use may slightly differ. For example, book value can also mean a company’s net worth while carrying value refers more to an individual asset’s value.