Difference between Book Value and Salvage Value

Book Value

The book value (also called the net book value) is defined as the total estimated value that shareholders of a company would receive if the management decides to sell or liquidate it at any given point in time. It aims to calculate the total assets of a company minus the intangible assets and liabilities. The book value is an important accounting measure that helps the analysts as well as investors to evaluate whether the company stock is underpriced or overpriced compared to its actual and fair market value.

It also helps the management of a company to get an overall estimate of the total price for which their firm can be sold in the market, which will help them to understand the future prospects of the firm. The net book value is a very handy tool that can be helpful to evaluate the profits and losses of an organisation, over a given period of time.

Salvage Value

The salvage value is an accounting tool that is helpful in providing an estimation of a tangible asset’s value at the end of its useful life. It aims to determine what the asset can be salvaged for, when it is not possible to use it any further for company operations. The main use of salvage value is to find out the annual amount of depreciation which can be recorded in the accounting books. The salvage value is also used for the purpose of calculating the depreciation expense on the tax returns.

It is important to note that the salvage value can sometimes be used merely as the best guess estimate. It may also be specifically determined by a regulatory or taxation agency. The salvage value is helpful in calculating the total depreciation on a yearly basis for the tangible assets. It will also help to determine the total tax deductions that an organisation is permitted to take for the purpose of depreciation of such assets.

Difference between Book Value and Salvage Value

Both book value and salvage value have some unique features which can be very useful for the firm. However, it is important to appreciate the fact that there exist some major areas of difference between book value and salvage value, and we will discuss them in the below table to get a wider perspective of this topic:

Book Value

Salvage Value

Definition

The book value is defined as the total value at which an asset is carried on the company’s balance sheet.

The salvage value is defined as the total estimated resale value of any asset at the end of its useful life for the company.

Cash Flow

In the case of the book value of an asset, the cash amount that is the same as the value, is received when the asset gets sold in the market.

In the case of the salvage value, the cash amount will be received upon the end of the useful life of an asset, which will be the same as the total amount of the salvage value.

Depreciation

The book value is the resulting value that is arrived at after accounting for the depreciation.

The total depreciation is calculated only after deducting the actual salvage value.

Calculation

The book value is calculated by the process of subtracting the accumulated depreciation (it is the total depreciation amount that is incurred up to a point of calculation of the book value) from the total cost of an asset.

The salvage value gets deducted from the total purchase price (cost) of a company’s fixed asset to help arrive at the actual asset cost that will be depreciated.

Conclusion

It is important to understand that both the book value and salvage value serve an important purpose in evaluating the usefulness of a company’s assets. The main difference between these two concepts is that the salvage value is the total estimated amount of cash receivables for an asset at the end of its useful life while the book value indicates cost minus the accumulated depreciation. Salvage value is an estimate that may not be the actual amount that is received at the point of resale of an asset. In the event of a liquidation, the total funds that are received will usually be greater than the book value due to the firm’s goodwill.

Frequently Asked Questions

What is the meaning of book value of a share?

The book value of a share is defined as a method to measure net value of an asset, which the investors get for buying a share of the total stock of a company. The investors can calculate the book value per share by dividing a company’s book value by the number of outstanding shares.

What is the implication for a higher book value?

The implication is that a higher book value is undoubtedly a favourable scenario, but investors in a successful company can expect its valuation to improve in the future. So it is more prudent for the investors to put in companies that have strong fundamentals as they will profit in the long run.

What are the implications of price per book value?

There are a few implications of the price per book value which are mentioned below:

  • It helps to measure the value offered by a company’s shares for their investors.
  • A lower price per book value is an indication towards a higher margin for safety. It means that the investors can be confident enough to recover their money quickly if the company winds up their operations.

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