The book value in accounting is the value of any tangible or intangible property in the books of accounts. This cost of the property or asset arises only after proper valuation of the assets less any depreciation including any repairs or expenses done to it if applicable on certain conditions. The cost of the assets represented in the final accounts of the company is termed as the book value of assets.
Equity
The equity of a company is represented in the liabilities side of the balance sheet. It is the left over value that has the rights of shareholders or owners of the company. The concept of residual value for the shareholders is nothing but the value of the company that remains as reserves after paying all the secured and unsecured debts of the company including preference shares and any miscellaneous expenses if available.
As it is clearly known by all the people that, the incorporation of every limited company in India needs huge capital to raise the company in the share market. These funds are raised from either the owners or directors of the company or from the public in consideration for shares. By purchasing, the shares for a specific face value (cost of the share determined by the company), the shareholders are given the rights to know the happenings in the company. The equity shareholders are treated as the true owners of the company as they have the right in the supervision of the company and get the complete list of the financial records of the company annually. However, they are also the maximum risk bearers of the company due to maximum stake acquisition.
Computation of Book value of Equity
The company management always makes the valuation of the equity shares in its books keeping it to the face value as much as possible. Then the immediate action taken by them is to compare the book value of equity capital or true assets with the existing market value. This will help the company board of directors get an idea of the exact status of the company in the market and draw a view on the company future. The equity shares are sold in the market by pre-determining a face value. While the preparation of balance sheet, the value of the equity shares may vary depending up on the market situation and the operation of the company. More the debts of the company, less is the market value for the equity and on the other hand¸ the book value of equity is more. This type of situation worsens the company status in the society thereby defaming the corporate image of the firm. At the same time, if the condition is vice-versa or the company balance sheets show lesser book value of equity than its market value, then the company is deemed to be in a profitable position. This happens because; the equity capital is the residual value of the company funds after deducting the liabilities, secured and unsecured debts, miscellaneous expenses and any other expenses spent for the repairs or functioning of any asset. Thus, it will be always profitable for any business to have the equity capital in its liability side of less value than the market value. This in turn increases the demand of the equity shares in the market and provides an option to the board of directors to raise the limit of authorized share capital if necessary for expansion of the business.
Thus, from the given concept it is clear that any company would be in a better position economically only if it has less external debts in secured or unsecured form. As the book value of equity plays an imperative part in the ownership status and enhance the corporate image of the company, it is very much necessary for any company to maintain the face value or book value of equity remain below the market value. This is the sole formula for any company to raise the profits of the firm in the future by assisting market expansion. The ultimate gain to any company with assist of the book value of the company equities is none other than reputation and the term reputation speaks more on behalf of the company rather than any profit making business operations.