Book value is an asset's accounting value on the balance sheet — original purchase cost minus accumulated depreciation. It often differs significantly from what the asset could actually sell for.
Book value (also called carrying value or net book value) is the asset's recorded cost less all depreciation charges taken to date. It reflects accounting history, not current market conditions. A piece of equipment bought 8 years ago for $200,000 with $160,000 of straight-line depreciation has a book value of $40,000 — regardless of whether it's worth $10,000 or $150,000 today. For real estate, book value typically understates market value in appreciating markets (land doesn't depreciate under GAAP). For equipment, book value may overstate value in industries where technology obsolescence outpaces depreciation schedules (computers, certain manufacturing equipment), or understate it for well-maintained, specialized equipment in niche markets. Lenders don't rely on book value alone for collateral decisions. They commission appraisals or use market comparables to determine actual collateral value. The gap between book and market value is one reason lenders apply advance rates (loan-to-value limits) against appraised value rather than book value. Book value of the entire business (total equity on the balance sheet) is also called 'book equity' or 'shareholders' equity.' A company with $1M in book equity may be worth $5M (strong earnings, intangibles, market position) or $200K (declining business, off-balance-sheet liabilities) depending on market conditions.
Book value follows accounting rules (historical cost minus depreciation); market value reflects what a buyer will actually pay today. Depreciation schedules are estimates of useful life, not predictions of resale markets. Real estate, equipment, and business goodwill all diverge from book value over time depending on market conditions and asset quality.
Market value (usually from an independent appraisal or equipment appraisal firm). Lenders then apply an advance rate (loan-to-value ratio) against appraised value. Book value is a starting point for identifying what assets exist, not a valuation input for lending decisions.
Negative book value (negative equity) occurs when total liabilities exceed total assets on the balance sheet. This can happen from accumulated losses, large buybacks, or heavy leverage. Many successful businesses operate with temporarily negative book equity — but it's a solvency signal that lenders scrutinize.