What Do Market Value and Book Value Mean?

What Do Market Value and Book Value Mean?

An asset’s market value shows its actual market price, where people would trade it at that price at the marketplace. On the other hand, an asset’s book value indicates its accounting value, which is calculated by subtracting accumulated depreciation or amortisation (Also see What is Goodwill Amortisation?) from the asset’s historical cost. This means that market value is the amount that people would buy or sell something in a marketplace, whereas the book value is the value of an asset that a company has recorded in its financial records.

The values of market value and book value may vary from time to time, and business owners should make corresponding adjustments in their financial statements if necessary. This is to make sure that those statements can present the financial position of their company accurately. Thus, if you find it hard to differentiate market value and book value, as well as make necessary adjustments in your financial statements, this article may be helpful for you. Otherwise, you can also contact an accounting firm in Johor Bahru as the experts will handle these for you.

The market value of an asset is the maximum amount that a buyer will be willing to buy an asset at that price in a competitive market. It represents the value that people would carry out the trading of a particular type of asset in the marketplace. As against, the book value of an asset is the value that the balance sheet shows.

Apart from assets, one can also determine the market values and book values of a company. To identify the market value of a company, particularly that of a public company, one has to multiply the current market price per share with the total number of shares. Also, numerous factors like the company’s performance, profitability and liquidity may lead to an increase or decrease in its market value. On the other hand, to determine the book value of a company, one should subtract the intangible assets (Also see Introduction to Tangible and Intangible Asset) and total liabilities of the company from its total assets. If the company gets liquidated immediately, this is the sum that will remain with it.

Both market value and book value can bring different advantages and information to the business owners. Compared to book value, market value can reflect the market trends better. Also, in the financial economists’ opinion, market value can illustrate the intrinsic value clearly. Those who want to launch a new project may find market value to be more useful as they need to know an estimated amount of funds that they need to inject.

As against, investors tend to look at the book value of a company before they decide whether they should invest in a company by buying its stock. One can determine the book value easily as this value appears in the balance sheet. Moreover, book value will not undergo fluctuation easily, except if the company changes its capital structure.

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