The Balance Sheet

Market Value vs. Book Value

Book value is the price paid for a particular asset, while market value is the price at which you could presently sell the same asset.

Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value, or fair market value. International Valuation Standards defines market value as "the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion. "

In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset minus any depreciation, amortization, or impairment costs made against the asset. An asset's initial book value is its acquisition cost or the sum of allowable costs expended to put it into use.

Assets such as buildings, land, and equipment are valued based on their acquisition cost, which includes the actual cash price of the asset plus certain costs tied to the asset's purchase, such as broker fees. The book value differs from market value, as it can be higher or lower depending on the asset in question and the accounting practices that affect book value, such as depreciation, amortization, and impairment. In many cases, the carrying value of an asset and its market value will differ greatly. If the asset is valued on the balance at market value, then its book value equals the market value.

Depreciation methods which are essential in calculating book value

There are four depreciation methods:

1. Straight-line method,
   
   
2. Double-declining balance method,
   
   
3. Sum-of-the-years' digits method, and
   
   
4. Productive output method.

Ways of measuring the value of assets on the balance sheet include historical cost, market value, or lower cost or market. Historical cost is typically the purchase price of the asset or the sum of certain costs expended to put the asset into use.

Market value is the asset's worth if it were to be exchanged in the open market in an arm's length transaction; it can also be derived based on the asset's present value of the expected cash flows it will generate. Certain assets are disclosed at lower cost in the market to conform to accounting's conservatism principle, which stresses that assets should never be overstated.