06 Apr Net Book Value (NBV)
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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 is Net Book Value (NBV)?
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:
What does net book value mean?
- 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.
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:
Example of net book value
|NBV at year-end||$9,100||$8,200||$7,300||$6,400||$5,500||$4,600||$3,700||$2,800||$1,900||$1,000|
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.