It can be confusing for those who are not familiar with the terms “replacement value” or “book value” to know their difference, but that is what we are here for today, to explain what is the difference between replacement value and book value? of book? Before we must know the concept of each one.
Replacement value is defined as the cost of replacing a fixed asset with another having the same characteristics. This accounting with revaluations, shows in a better way how the company is.
The replacement value is the highest book value, this due to current inflation. Does not apply to industries with high experience. On the other hand, the book value or accounting value is the net value that is registered in the accounting, this is calculated with the cost of the acquisition. It is the value that is taken into account if you want to sell a good.
Taking this into consideration, we will talk more in depth about each aspect, because just by explaining a little better what each one means, it is evident that they are totally different concepts. Although their objective is to calculate costs and must be taken into account for the planning of a company, they are different from each other, things that we will see below.
replacement value
The replacement or replacement value is a cost that involves the substitution of a damaged good with a new one. Clearly, the price can go up or down depending on the good. This type of value is used more than anything in the insurance area, since it is the main function of these services.
Already in a business or business environment, the replacement value has been referring to the investment that the company would have to make, in case of needing a new element, this replacing the previous one.
It could be said that companies use this value, in order to give responsibility to the monetary cost of replacing goods in the company and acquiring new ones. This is done taking into account inflation, since it is a variable that affects this type of calculation. In accounting, in addition to replacement value, it is known as the cost method.
book value
The accounting value or book value is the “gross” amount of an asset or a liability that is recorded in a balance sheet once it is deducted, in the case of assets, its amortization is accumulated and for any deterioration that has occurred. registered. In other words, it is the value for which it is registered in an accounting book. This serves to assign a monetary cost to each element that is part of the accounts of the year.
In the business case, it is the value of a good according to the financial statements of the company, it is still the cost of the good minus depreciation. Accountants generally use the book value to determine expenditures of money in the company.
These monetary expenses will be any, but it is expected that over many accounting periods, it will create income, as this is a tax deduction for the business. This helps decision making for the top of the business structure.
We can see then that they are not the same concepts, while the replacement value is responsible for calculating the cost that a company will have to assume, when replacing one good and substituting it for another, the accounting value or book value, refers to the one that It is used to calculate expenses of any kind, in turn it is a valuation method that companies have. We hope this article on the differences between replacement value and book or accounting value has been useful to you.
