06 Apr Net Book Value (NBV)
What is Net Book Value (NBV)?
Definition: Net book value, which is abbreviated as NBV, refers to the original cost of an asset as reduced by the accumulated depreciation that has been charged on it. NBV is sometimes also referred to as net asset value (NAV).
What does Net Book Value mean?
When a business acquires a fixed asset, it is necessary to depreciate it over its useful life. The depreciation that a firm charges on an asset will be based on several factors. These are:
- Cost of the asset – this includes the cost of acquisition as well as the expenses that are incurred to bring it to the location where it will be used and to make it operational.
- Useful life of the asset – a firm will usually have a very good idea of the number of years for which an asset can be used.
- Salvage value or end value – an estimate is made of the value at which it will be possible to sell the asset at the end of its useful life.
Consider an asset that costs $10,000 and has a useful life of 10 years. At the end of this period, it is expected to be sold for $1,000. The firm will need to charge $9,000 in depreciation over a 10-year period. The yearly depreciation charge on a straight-line basis will be $900.
Consequently, the NBV of the asset will be $9,100 ($10,000 minus $900) at the end of the first year and $8,200 ($9,100 minus $900) at the end of the second year. In this manner, the asset will continue to be depreciated till its NBV is $1,000 at the end of the tenth year.
It’s important to remember that the NBV of an asset is not necessarily equal to its market value. The depreciation that is charged on the asset is an accounting entry and the resultant NBV may be higher or lower than the price at which the asset could be sold in the market.
Example of Net Book Value
Let’s get a better understanding of the manner in which NBV is calculated by studying an example.
Osborne Engineering purchased certain equipment on January 1, 2010. These are the details:
Type of equipment purchased: Machinery
Cost of the equipment: $10,000
Useful life of the equipment: 10 years
Salvage value at the end of 10 years: $1,000
The NBV of the machinery at the end of every year will be:
|NBV at year-end||$9,100||$8,200||$7,300||$6,400||$5,500||$4,600||$3,700||$2,800||$1,900||$1,000|
At the end of 2019, the NBV will be $1,000, which is equal to the machinery’s estimated salvage value.
The NBV of an asset is the amount at which it appears in a company’s accounting records. This value gradually declines because of the depreciation that is charged on the asset. At the end of the asset’s useful life, the NBV is equal to the estimated salvage value.