Difference Between Book Value and Market Value

Book value of an asset denotes its accounting value, which is nothing but the historical cost less
accumulated depreciation/amortization. Market value of an asset represents the actual market price of
the asset, that is traded in the market place. It can also be understood as the actual worth of the firm
relating to other firms in the marketplace.

Book Value, as the name signifies, is the value of the commercial instrument or asset, as entered in the
financial books of the firm. On the other hand, Market Value is defined as the amount at which
something can be bought or sold on a given market.

People find it a bit difficult to identify, which one will prove the best for an investor to consider before
investing his money in the company. These two values may vary, or they may be same but above all, you
must know that the difference between book value and market value will show you the profit or loss.
Conversely, if the values tally then there would be no profit no loss.

Definition of Book Value

Book Value, for assets, is the value that is shown by the Balance Sheet of the company. As per generally
accepted accounting principles, the asset should be recorded at their historical cost less accumulated
depreciation.

In the case of a company, the book value represents its net worth. It can be calculated by reducing the
total liabilities and intangible assets from the total assets. It is the amount which will remain with the
company if it gets liquidated immediately. Such an amount is expected to be distributed among the
numerous shareholders.

Definition of Market Value

Market Value is described as the maximum amount that a buyer is ready to pay for an asset in a
competitive market is known as Market Value. It is the value at which the trading of the asset is done in
the marketplace.

Now if we talk about the market value of a company, it is the value of the public company. It is popularly
known as Market Capitalization. Market Value is the result obtained through the multiplication of the
total number of shares with the current market price per share. It is a certain amount, but its basis is not
definite, i.e. the current market price of a share is determined on the basis on which the company’s
trades take place.

There are end number of factors can influence the market value of a company like profitability,
performance, liquidity or even a simple news can increase or decrease its market value.
Key Differences Between Book Value and Market Value

• The major differences between book value and market value are indicated below:
• The value of assets or securities as indicated by the books of the firm is known as Book Value.
Market value is that current value of the firm or any asset in the market on which it can be sold.
• Book Value is the actual worth of an asset of the company whereas Market Value is just a
projected value of the firm’s or asset’s worth in the market.
• Book Value is equal to the value of the firm’s equity. Conversely, Market Value shows the
current market value of the firm or any asset.
• Book Value changes annually, but Market Value changes every next moment.
• For the calculation of book value, only tangible assets are taken into consideration, but market
value considers both tangible as well as intangible assets.
• Book Value is always readily available, however, the projection of market value on the current
market price of a single share, it is not readily available.
• When the book value is greater than the market value there is profit, but if the book value is less
than the market value there is a loss. However, if these two values coincide, there is a situation
of no profit no loss for the company.

Merits of Book Value

• It is easy to calculate as the information exists in the company’s balance sheet.

• The information will be useful to the investors, in deciding whether to purchase the stock or not.
• It shows the actual cost or outflow or acquisition cost of the asset.
• It does not fluctuate easily unless the capital structure of the company changes.
• Merits of Market Value
• According to the financial economist, market value shows a clear picture of the intrinsic value.
• It is suitable for new projects, that require an inflow of capital.
• It reflects the current market trends.

Balance Sheet items are shown in book value as per Generally Accepted Accounting Principles (GAAP).
On the other hand, according to International Financial Reporting Standards (IFRS), the assets will be
reported on the balance sheet at their fair values. IFRS is expected to be adopted by all the countries
soon. After the adoption of IFRS, the divergence between the two values will be reduced.