Accounting Value Definition: Everything You Need to Know
To understand accounting value definition, you first need to understand book value. The book value of a company is how much its assets are worth.3 min read
To understand accounting value definition, you first need to understand book value. The book value of a company is how much its assets are worth. The terms book value and accounting value are often used interchangeably, and they basically mean the same thing. Worth noting, however, is that the accounting value is different from a company's market value. In fact, the amount difference between the two is often very significant.
What Is the Difference Between Market Value and Book Value?
To interpret the difference between market value and book value, you must look at their orientation. When speaking of accounting values, you are looking backward. The market value, on the other hand, is what the value of the company is likely going to be in the future.
Financial accounting has several fundamental principles, with one of the most important being conservatism. The conservative company strives to never overstate what its assets are worth. This applies to its assets, profit margins, profit potentials, and more. It also never wants to understate things like the extent of its liabilities. When a company is listing its assets and their worth, it will list them on a balance sheet, and the value of each asset will be determined in a very objective manner.
What Is the Historical Cost of a Company?
For many companies, their accounting values will be the amount of money it took to acquire them. This is known as their historical costs. This type of accounting value is objective and can be verified if necessary. As the assets of a company age, they depreciate in value. This translates into the book value of the company decreasing.
Sometimes, it's not uncommon for the assets to actually be worth more than what their accounting values are stating. However, the only true way to determine the real value of an asset is to sell it.
Do Trademarks Have Value?
Due to conservatism, it is not uncommon for some assets that are very valuable to not be listed on the balance sheet. It's important to note that trademarks and reputations have no value, so they are not to be listed on the balance sheet. It is only after some type of intangible asset has been purchased by a separate entity that it can be listed with a value on the balance sheet.
What Is an Arm's Length Transaction?
According to accounting standards, an arm's length transaction concept is used to determine the market value of an asset. This means that whatever amount the asset can be sold for during an arm's length transaction is what the actual market value of the asset is. An arm's length transaction is a sale that takes place between unrelated parties. All parties must be willing to go into the transaction, or it is not considered an arm's length transaction.
What Is the Issue With Listing Current Market Values?
There is often a problem when companies try to list their current market values on a spreadsheet. The issue with this stems from the fact that it's not really possible to determine the market value until the asset (company) has been sold. If we lived in a world where companies could list their assets according to what they thought they should be valued at, we would live in a world where asset values were heavily inflated, and this would not be good.
Examples of assets that can be listed on a balance sheet as having some type of market value include:
When listing the value of assets on a balance sheet, their accounting value has to be listed rather than their market value. Because of this, the accounting value of a company is usually far less than what it can actually be sold for.
If you want to put some type of price tag on your company, you can start by trying to calculate a book value. However, remember that you never really know the true value until you sell the company, and for many businesses, this simply isn't possible. It's not possible because either you don't want to sell the company, or you have something holding you back from being able to sell it.
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