Book value

This article is currently being developed as part of an Eduzendium student project. If you are not involved with this project, please refrain from collaboratively developing it until this notice is removed. Articles that lack this notice, including many Eduzendium ones, welcome your collaboration!

Book value is the recorded cost on the books for the purchase of an asset. This recorded cost is known as the historical cost. Companies in the United States, in conjunction with Generally Accepted Accounting Principles (GAAP), record all assets at their historical cost. It is essential to understand book value in contrast to market value. According to the textbook (Essentials of Corporate Finance), market value is the "true value of an asset" or in other words "the amount of cash we would get if we actually sold it." The book value of an asset does not necessarily, and in fact, rarely coincides with an assets worth from a market value standpoint. Current assets can often show an exception to this because of their quick turnover. Current assets may have similar book and market values because these assets are turned into cash in a very short period of time. Due to the speed of this turnover, there is not much time for the market value to fluctuate greatly from the book value. Fixed assets are much more likely to have a market value with greater deviation from the book value. This is because fixed assets have much more time to fluctuate in value according to changing market conditions.