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Net book value is an accounting term that states the net value of an asset or liability on the company’s financial statements. Assets and liabilities are recorded on the company’s balance sheet; monthly and annual balance sheets are prepared to give internal and external stakeholders a snapshot of the company’s value at specific time period. The net book value of assets is usually equal to the original cost of the asset less any accumulated depreciation. Net book value is commonly used in conjunction with long-term assets that include properties, plant or equipment. Liabilities that use the net book value calculation may include mortgages, short- or long-term credit lines and other various loan instruments.
Accumulated depreciation of an asset represents the monthly or annual usage amount of the asset in business operations. Common methods used to calculate depreciation include straight line, double-declining balance, and the number of units produced. The straight line depreciation method calculates the net value of an asset by taking the total cost of the asset minus the salvage value divided by the total number of years the asset will be used. The double-declining balance method is similar to straight line depreciation; the only difference is that companies take each year’s depreciation method and double the amount to increase the depreciation amount of the asset. The number of units produced calculates the assets net book value by taking the historical cost of the asset less the salvage value divided by the total number of units the asset can produce. As units are produced each month, accountants multiply the calculated depreciation amount by the total number of units produced to decrease the asset value.
Another method to calculate depreciation called the modified accelerated cost recovery system (MACRS) is a special depreciation method companies are required to use when calculating depreciation for business income tax purposes. This special depreciation method creates a special tax value companies use when calculating an asset’s net book value. This calculation is only used when applying current tax law to business assets.
The net book value of liabilities is calculated by taking the accounting ledger’s book value of the bank loan and reducing it by the monthly principal payments made to the bank. If companies have negotiated balloon repayments or other special payments to banks or lenders, the historical value of the loan remains on the accounting ledger until a payment is made to the bank. Delaying payments for bank loans increases the liabilities amount on the company’s balance sheet and may reduce the company’s ability to obtain future bank loans or equity investments from investment firms or private investors.
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