What is the Net Book Value Of Assets?

The net book value of an asset is the amount that an organization records for that asset in its accounting records.

Net book value doesn’t necessarily reflect the actual market price of an asset, though. It’s an accounting method businesses use to gradually reduce the recorded cost of a fixed asset.

How net book value works

Net book value (NBV) is one of the most common financial metrics that organizations use. You can use NBV to reduce the value of assets like vehicles, printers, and other assets. Ideally, an asset’s value should decline steadily over time and NBV reflects that reduction. At the end of its life, the net book value of an asset should be about equal to its value as salvage.

In practice, businesses use NBV to calculate their business’s value. When you know the value of your assets today and their value several years from now, you can calculate a more accurate valuation for your business for tax reasons or for mergers and acquisitions (M&A).

You calculate NBV by looking at the original cost of an asset and subtracting:

… from that value.

Your original cost is also called the total acquisition cost of the asset. This includes things like the purchase price, sales tax, delivery charges, setup fees, duties, etc.

You can reduce the original cost of an asset over its lifetime by subtracting depreciation, depletion, or amortization. Impairment can also count against the original value: this comes from a huge loss in an asset’s value, which is usually when the market value is less than your NBV.

The net book value formula

Organizations calculate net book value with this simple formula:

NBV = gross cost of asset - accumulated depreciation

To calculate accumulated depreciation, you’ll need to use this formula:

Accumulated depreciation = per year depreciation x total number of years

For example, let’s say the original cost of a vehicle you purchased for your business is $50,000. That includes all of the costs associated with the purchase, such as taxes, delivery, and setup.

If you want to get 20 years out of the vehicle and expect it to have a $5,000 salvage value, you can calculate the annual NBV as:

($50,000 cost - $5,000 salvage) 20 years = $2,250 depreciation per year

In other words, after 5 years, your vehicle will lose value (or depreciate) by $11,250. At that time, you would log the NBV for the year as $38,750.

Why net book value matters

Net book value is a valuable accounting metric that businesses use to understand the value of their assets over time. NBV is helpful for valuing a company; after all, you can’t separate a business’s value from the assets it owns.

NBV helps businesses calculate a fairer valuation for the company’s total value. Sometimes a business needs to understand its total value for its accounting records. It’s also useful for M&A or if the company is considering liquidation.

Keep in mind that NBV isn’t the same as market value because it doesn’t depend on supply and demand. Typically you’ll see NBV recorded at a much lower figure than market value, especially during the first 2-5 years of the asset’s life.

Whether a business is preparing to sell or just needs to understand its value, NBV is a useful metric for recording a fair, accurate value for a business’s assets.