Legal Definitions - net book value

Net book value refers to the value of an asset as it is recorded in a company's financial records, after subtracting the total amount its value has decreased over time due to wear, tear, or obsolescence (known as depreciation).

Essentially, it's the asset's original cost minus all the depreciation that has been accounted for since it was acquired. This figure represents the asset's current carrying value on the company's balance sheet.

• Example 1: A Construction Company's Excavator

  Imagine a construction company purchased a new excavator for $300,000 five years ago. Each year, the company records a depreciation expense of $30,000 to account for the machine's wear and tear and its declining usefulness. After five years, the total accumulated depreciation would be $150,000 ($30,000/year * 5 years).

  The net book value of the excavator would be its original cost ($300,000) minus the accumulated depreciation ($150,000), resulting in a net book value of $150,000. This is the value at which the excavator is currently listed on the construction company's financial statements.

• Example 2: A Restaurant's Commercial Oven

  A popular restaurant bought a high-capacity commercial oven for $25,000 three years ago. The restaurant's accounting policy depreciates such equipment by $2,000 annually. Over three years, the total depreciation recorded for the oven is $6,000 ($2,000/year * 3 years).

  The net book value of the oven would be its initial purchase price ($25,000) less the total depreciation ($6,000), making its current recorded value $19,000. This figure reflects the oven's value on the restaurant's balance sheet, considering its age and use.

• Example 3: A Software Company's Office Computers

  A growing software development firm invested $50,000 in new desktop computers and monitors for its employees two years ago. The company depreciates these computer assets by $10,000 each year, reflecting their rapid obsolescence in the tech industry. After two years, the total accumulated depreciation is $20,000 ($10,000/year * 2 years).

  The net book value of the office computers would be their original cost ($50,000) minus the accumulated depreciation ($20,000), resulting in a net book value of $30,000. This is the value at which the computers are carried on the software firm's financial records, reflecting their reduced value due to age and technological advancements.