 Hello in this lecture we will define book value according to fundamental accounting principles while the 22nd edition the definition of book value is assets acquisition costs less its accumulated depreciation or depletion or amortization also sometimes used synonymously as the carrying value of an account couple key points of the definition here we are generally talking about assets when we are thinking about book value more specifically we're often talking about property plant and equipment or intangible assets assets that will have depreciation or depletion or amortization over time so we're going to put the asset on the books as an asset when purchasing it and then we're going to allocate that cost in the form of depreciation depletion or amortization for example if we had a tank here that's going to be a piece of equipment that we are purchasing we would then put it on the books if we paid cash for it or a loan for it at the purchase point we would not be expensing it as tools or equipment expense we would be putting it on the books as an asset because it's going to benefit it's going to benefit the future so we're going to be using this to help generate revenue in the future therefore we're going to be putting it on the books as an asset as opposed to if we purchased something like small tools when we consumed it sometime near the point of purchase therefore we would expense it that's going to be in accordance with the matching principle once we have the tank on the books as equipment in this case then we're going to depreciate it over the useful life in an attempt to match that cost to the use the time period in which it has been used to help generate revenue now we're going to do that not by decreasing the equipment directly but by creating another account called accumulated depreciation why would we do that because that'll tell our reader a few different things it's going to tell our reader look this is the cost that we have on it and we're going to decrease that cost and expense it over the useful life however it's just an estimate and in order to indicate to our readers that it is an estimate and it's not obviously we only have one piece of equipment here and over the useful life it's not going to go away but the value will go down therefore we're going to record the decrease in value in another account to show that decrease the easiest way to do this the most basic way and the way we first think about when we think about any other formats of calculated depreciation we usually start with the straight line method so a straight line method of depreciation would take the cost minus the salvage value the amount that it will be worth at the end of the useful life such as scrap we can scrap it for even if it's not useful we might be able to scrap it for parts that will give us the amount that we need to depreciate over the useful life then we're going to divide by the useful life this being four years estimating how long we're going to use this piece of equipment in order to help us generate revenue that will give us the yearly depreciation so in this case we have 59 375 that we will depreciate each year over the useful life of four years that will result after four years of an accumulated depreciation of 237 500 leaving us with a book value calculated at cost minus the accumulated depreciation at the end of four years of the salvage value of 20,000 so if we were to record the depreciation for example in year one then we would have the debit to the depreciation expense allocating the expense for that year so of the cost of 257 500 we believe that we're going to use up 59 375 of it therefore decrease net income by the amount that we have consumed of that cost in accordance with the matching principle we're going to record a contra asset an asset with a credit balance in accumulated depreciation of the 59 375 the difference here being the book the book value book value is going to be a cost 257 500 less the accumulated depreciation 59 375 accumulated depreciation being different than depreciation expense accumulated depreciation being an asset an asset that will continue to accumulate over the useful life so for example in year two we're going to have the same depreciation expense as we had in year one but the accumulated depreciation will go up from 59 375 that we had in year one plus another 59 375 depreciation expense accumulating the total depreciation in accumulated depreciation to 118 750 therefore the book value in year two would be the 257 5 minus the 118 750 accumulated depreciation of a book value in of 137 138 750 as opposed to year one where we had the same cost 257 5 minus one year's accumulated one that accumulated depreciation as of the end of year 159 375 for the book value of 198 125