What is book value?

Book value is the value of an asset as recorded on the balance sheet, typically calculated as original cost minus accumulated depreciation for fixed assets. For professional service firms, book value provides the accounting basis for assets, though it may differ significantly from market value or replacement cost.

Key characteristics

• Value recorded on the balance sheet

• Cost minus accumulated depreciation

• Basis for disposal calculations

• May differ from market value

• Foundation for asset tracking

• Used for financial reporting

Why it matters for professional service firms

Book value provides a consistent basis for asset tracking and financial reporting. Understanding the difference between book value and actual value helps with decision-making. Professional service firms should track book values for asset management while recognizing that book value may not reflect what assets could sell for or what it would cost to replace them.

Real-world example

Patricia's firm had computers with an original cost of $60K and $48K in accumulated depreciation, with a book value of $12K. Considering replacement, she investigated actual values: resale value approximately $5K (below book value), replacement cost $75K (above original cost). Book value was neither what they could sell for nor what it would cost to replace. Decision: replace now while current computers still function; $5K proceeds versus $12K book value, creating a $7K loss on books, but making business sense given replacement needs.