Net book value

What it means

Net book value is the cost of an asset less the depreciation charged. It shows how much of the value has yet to reach expenses.

The accounting and tax figures differ because tax depreciation follows the statute while book depreciation follows real wear. On a sale it is the tax figure that counts.

Net book value is not market value. A car can reach a tax net book value of zero once its depreciation period ends and still sell well, while a machine with a high net book value may be obsolete and unsellable. Real worth is shown by a valuation or fair value, not by the depreciation plan.

How it works in practice

On disposal the net book value goes to expenses, and its deductibility depends on the reason: sale, scrapping, damage, donation. There is no single rule for every case.

For insurance, net book value misleads: the sum insured should follow replacement cost. That gap is precisely what leaves company buildings and plant underinsured.

When company assets are sold we compare the sale price with the tax net book value. The difference is a taxable gain or a loss on the sale. When selling to a member, the director or another related party, however, the price must match the market, or the tax office will adjust the base and assess the difference.

What to watch out for

An asset depreciated to zero still has real value and the company still uses it. Removing it from the register because it is fully depreciated is a mistake: it stays until it actually goes.

Net book value changes through more than depreciation. A capital improvement raises it and a suspension of depreciation freezes it for a while. If these changes are not entered on the asset card, later years’ depreciation runs from the wrong base and the disposal or sale produces the wrong result.