What is Accounting Valuation?

Jim B.

Accounting valuation is a process by which the value of a company or business is measured in terms of their assets and liabilities. This process can be achieved through several different methods, with the ultimate goal being the most precise picture of the company's immediate financial health. Many different scenarios may arise that call for accounting valuation, from a bank or lender assessing the viability of a business looking for a loan to the business itself wishing to take a look at how they are performing in the market. In all cases, this process must include the most recent assessment possible of the company since its value may change significantly in just a short passage of time.

Man climbing a rope
Man climbing a rope

Many methods of measuring a company's financial strength exist, from assessing their financial statements to calculating complicated ratios on the information gleaned from those statements. Accounting valuation might be the most cut and dried of these methods, as it simply aims to determine the exact value of the company at a specific time. This is done by attaching prices to all of the company's assets and liabilities and summing all of that up to get an overall value.

Assets for businesses may include such items as stocks, bonds, options, various business ventures, any real estate owned by the company, and things such as patents or trademarks whose values are a bit harder to define. One example of a liability that can be found on the company's books is the practice of issuing bonds to employees. When all of these different sets of numbers are tallied in the process of accounting valuation, the company receives a value it can use for the purpose of reporting to lenders, investors, or employees, depending on the situation.

There are three general methods of accounting valuation commonly used. Measuring different assets in terms of the prices of similar assets on the market is known as the relative cost method. Comparing an asset's future earnings potential with its present value comprises the discounted cash flow method of asset assessment. Finally, the option pricing model of valuation must be used when a company grants options to its employees.

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No matter what method is employed, the timing of the accounting valuation is directly tied to its accuracy. Since the market is always changing and demand for different products and businesses is fluid, a valuation that is even slightly dated can be extremely inaccurate when compared to the company's actual, current value. It's also important that the valuation be carefully analyzed by whoever desires the results, since the values for certain assets can be fudged somewhat by accounting tactics to skew the results.

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