What is a Book Cost?

Book cost is the value of an asset as listed in a company's balance sheet. This is the original cost minus factors such as amortization, depreciation and impairment. Book cost can also be described as book value or carrying value.

The book cost becomes a factor on a company's balance sheets. This is not a record of the company's expenses and revenue, but rather its current worth. This is made up of assets and liabilities, and effectively show how much, if any, money would be left over if the company was liquidated.

The book cost aims to produce a financial assessment of what an asset is worth to a company at any one moment. The most notable element is depreciation. This is a recognition of the fact that some assets may be of less value to a company in the future or even end up effectively worthless. Examples of this include technology that will become outdated, or machinery that will eventually wear out.

To take account of depreciation, companies usually designate a lifespan for the asset's useful life, as well as a final value; this value can be zero, or can be a specific figure that the company expects to be able to sell on the asset at the end of its useful life. For balance sheet purposes, the book cost of the asset is reduced proportionally each year in line with the designated lifespan and final value. The exact method used for these calculations is often set down by both accounting and tax laws in a country.

There are two other factors taken into account when calculating a book price. Amortization is used for financial assets and takes account of both the diminishing balance over time, and the effects of inflation. Impairment is usually a one-off alteration made to an asset's listed value, and is used when a company finds it has significantly overpaid for an asset and needs to reflect this on its balance sheet.

Usually, book cost refers to a specific asset. This contrasts to book value, which can cover both a specific asset and an entire company. In the latter case, the calculation method is not always consistent: book value for a company is always made up of assets minus liabilities, but may include or exclude goodwill and intangible assets. Goodwill is an attempt to value the relationships a company has built up with suppliers and customers, while intangible assets covers factors such as intellectual property and trade secrets.

Book value in a finance context should not be confused with the same phrase in the market for autos. Here, it refers to a new or used car model's listed guide price in a reference book such as the Kelley Blue Book. This price can be used as a reference and starting point in negotiating a price for a particular vehicle.