Net book value: formula, examples, and what it means

Net book value turns up on balance sheets, depreciation reports, insurance questions and the paperwork for selling old equipment, and it is easy to read more into it than it says. It is not what an asset is worth to a buyer. It is what is left of the asset's cost after depreciation, which makes it useful for some decisions and misleading for others.

What net book value means

Net book value is the amount an asset is carried at in the accounts: what it cost, minus all the depreciation recorded against it since it was placed in service. The Federal Reserve's property and equipment accounting manual defines it in exactly those terms, as "gross asset value less accumulated depreciation."

You will also see it called book value, carrying amount, carrying value or, in some countries, written-down value. For a single asset they all mean the same figure. For a whole company, "book value" usually means something else: total assets minus total liabilities.

The net book value formula

Net book value = original cost − accumulated depreciation − impairment losses

• Original cost is the capitalized cost of the asset: the purchase price plus the costs of getting it ready for use, such as delivery and installation. What is a fixed asset? covers what gets capitalized in the first place.
• Accumulated depreciation is the running total of depreciation recorded against the asset so far.
• Impairment losses are write-downs recorded when an asset loses value in a way depreciation does not capture, such as serious damage. Most small businesses rarely record one, so for them the formula is simply cost minus accumulated depreciation.

Salvage value does not appear in the formula. It sets the floor: depreciation stops when net book value reaches the salvage value, so an asset with a salvage estimate never falls below it.

A worked example

A delivery van costs $42,000, is expected to last six years, and should sell for $6,000 at the end. Straight-line depreciation is ($42,000 − $6,000) ÷ 6 = $6,000 a year.

At the end of year six the van's net book value equals its salvage value. That is the end point the Federal Reserve manual describes: at the end of an asset's useful life, its "net book value should equal its salvage value." From then on no more depreciation is recorded, and the van is fully depreciated even if it stays in service for years.

The depreciation method changes the number

Net book value depends on the depreciation method as much as on the asset. Here is the same van under double-declining balance, which applies twice the straight-line rate to the remaining book value each year and stops at the salvage value:

Two years in, the same van is on the books at $30,000 or $18,667, depending on a policy choice. Neither number says what the van would fetch. The free depreciation calculator runs both methods, and the others, for any asset.

Net book value is not market value or tax basis

Market value can sit well above or below book value. A well-kept truck can sell for more than its book value years after it is fully depreciated, while a laptop can be worth less than its book value a year after purchase.

Tax basis follows its own path. IRS Publication 551 says to "decrease the basis of property by the depreciation you deducted, or could have deducted," and tax depreciation is often faster than book depreciation. So the same asset can carry a book value of $18,000 and a much lower tax basis. Keep the two figures clearly labeled, and let your accountant own the tax one.

Net book value when you sell or scrap an asset

When an asset leaves the business, its cost and its accumulated depreciation both come off the books, and the difference between what you receive and the net book value is a gain or loss. The Federal Reserve manual describes the same steps: deduct "the gross asset value and the related accumulated depreciation," then record the difference between net book value and the proceeds.

Say the van is sold at the end of year four, when its net book value is $18,000:

That is the book result. For tax, IRS Publication 544 measures a gain as the amount realized above the property's adjusted basis, so the taxable gain is figured against tax basis, not book value. The depreciation journal entries guide shows how to record each case.

Where net book value appears on the balance sheet

Fixed assets are usually shown at cost, less accumulated depreciation, with the net figure carried into total assets:

Some statements show only the net figure and put the detail in a note. For companies filing with the SEC, Regulation S-X Rule 5-02 requires accumulated depreciation of property, plant, and equipment to be set forth separately, either in the balance sheet or in a note.

What net book value is useful for, and what it is not

Net book value earns its place in three jobs:

• Reconciling the register to the ledger. The total net book value in your asset register should match property and equipment, net, in the general ledger. A gap usually means an asset was sold or scrapped in one record and not the other.
• Pricing a sale or trade-in. Knowing the book value before you sell tells you whether the deal will book a gain or a loss.
• Finding ghost assets. Equipment that went missing but was never written off still carries its cost and accumulated depreciation, and once it is fully depreciated, its zero book value means nobody notices. A physical asset inventory is how you find it.

It is the wrong figure for two others:

• Insurance. A fully depreciated machine can have a book value of zero and a replacement cost of tens of thousands of dollars. Insured values come from replacement cost or actual cash value, not book value.
• Replacement planning. Book value tells you how much cost is left to expense, not how much life is left in the asset. The useful life guide covers estimating that.

How AssetCenter fits

AssetCenter's fixed asset management software includes a depreciation report that shows every asset's current-year depreciation, accumulated depreciation and net book value, by straight-line, double-declining balance, 150% declining balance, sum-of-years' digits or MACRS. Under the book methods an asset never depreciates below its salvage value. The month of purchase counts as a full month and the first and last years are prorated from there, the figures can follow your fiscal year, and the report exports to Excel.

The report reads from the same record that holds each asset's location, custodian and history. Decommissioning an asset as Sold or Retired keeps its history and costs in your reports, and the depreciation report can be filtered by status, so assets that have left are easy to separate from those still in use. AssetCenter does not post journal entries, record impairment write-downs, keep separate tax and book values, or replace your general ledger.

Frequently asked questions

Is net book value the same as book value?

For a single asset, yes: both mean cost minus accumulated depreciation. For a company, book value usually means total assets minus total liabilities, which is a different figure.

Can net book value be negative?

No. Depreciation stops when net book value reaches the salvage value, or zero if there is none, so accumulated depreciation never exceeds the asset's cost.

Does net book value include salvage value?

Salvage value is not subtracted in the formula. It is the floor: at the end of the useful life, net book value equals the salvage value.

How do you calculate net book value for all your assets?

Add up the cost of every asset still on the books and subtract the total accumulated depreciation, or export the figures from your register or depreciation schedule. The fixed asset depreciation schedule guide shows how to set that up and reconcile it.

Next step

Take one asset with a known cost, in-service date, useful life and salvage value, and work out its net book value today, by hand or with the depreciation calculator. Then compare your register's total net book value with property and equipment, net, in the general ledger, and use the fixed asset depreciation schedule guide to trace any difference.

By Jeremy Francis

Founder & CEO, AssetCenter