Updated July 11, 2023
Definition of Book Value of Debt
Book Value of Debt refers to the total amount which the company owes to the others, i.e., the amount payable by the company, comprising of the Notes payable amount, long-term debt, and the current portion of the long-term debt where the value of these items is present in the balance sheet of the company. It does not include accrued liabilities and accounts payable.
Explanation
Book value of the debt refers to the value of Notes payable amount, long-term debt, and the current portion of the long-term debt as per the company’s balance sheet. While deriving at the b.v of the debt, the market value of any components is not considered. It is one of the important measurements for calculating the company’s liquidity ratios, where this value compares with the cash flows or the assets to know the organization’s capability to support its debt.
Example of Book Value of Debt
For example, there is a company named ADLTrading, whose balance sheet shows the following balances as of 31 March 2020:
Balance Sheet of ADL Ltd As of 31st March 2020
| Particulars | Amount ($) |
| Liabilities and Shareholder’s Equity | |
| Shareholder’s Equity | |
| Equity Capital | 500,000.00 |
| Retained earnings | 60,000.00 |
| Total shareholder’s equity | 560,000.00 |
| Non -current Liabilities | |
| Long term debt | 56,600.00 |
| Total Non -current Liabilities | 56,600.00 |
| Current Liabilities | |
| Accounts Payable | 15,000.00 |
| Notes payable | 14,000.00 |
| Current portion of the long-term debt | 25,000.00 |
| Total Current Liabilities | 54,000.00 |
| Total shareholder’s equity and liabilities | 670,600.00 |
| Assets | |
| Non-Current Assets | |
| Land | 515,000.00 |
| Property and Equipment | 106,000.00 |
| Total Non -current Assets | 621,000.00 |
| Current Assets | |
| Cash and Cash Equivalents | 25,600.00 |
| Accounts receivable | 6,800.00 |
| Inventory | 17,200.00 |
| Total Current Assets | 49,600.00 |
| Total Assets | 670,600.00 |
Calculate the B.V of debt.
Solution:
Book Value of Debt = Notes Payable + Long Term Debt + Current Portion of the Long Term Debt
- B.V of Debt = 14,000 + 56,600 + 25,000
- B.V of Debt = $95,600
Book Value of Debt vs Market Value of Debt
The difference between the B.V of the debt or market value of debt is provided and discussed below-
- The market value of debt is the value at which the company’s investors are ready to buy the debt, whereas, on the other side, the B.V. of the debt is the value of debt calculated as per the value present in the company’s balance sheet.
- Calculating the B.V. of debt is easier as all the values are already present in the balance sheet. One just has to add the value of all the components that are to be considered while calculating the book value of debt, whereas, on the other side, it is comparatively difficult to calculate the market value of debt because all the debts are not publically traded like in case of bank loan as they do not trade in the market and also their value tends to change from time to time due to the inflation factors, for the debt which is not publicly traded, it is difficult to calculate their market values.
How to Find Book Value of Debt?
B.V of the Debt can be calculated using the below-mentioned formula:
Notes Payable + Long Term Debt + Current Portion of the Long Term Debt
The balance sheet of every company is divided into three sections i.e., the equity section, the liabilities section, and the assets section. The value of these items, as required for calculating the B.V. of the debt, can be found on the liabilities side of the company’s balance sheet. Sub-categorization of these items is:
- Notes payable are the written promissory notes which do not earn interest. These are listed under the head current liabilities of the liabilities section.
- Long-term debt is repayable after one year and is listed in the balance sheet’s long-term liabilities section.
- The current portion of long-term debt refers to the part of the long-term debt due for repayment in the next year only. Since they are repayable within one year, they are listed under the current liabilities of the liabilities section.
Advantages
The advantages of the B.V of debt are provided and discussed below:
- While calculating liquidity ratios in the company, book value is used mostly where the same is used to see whether the organization is capable enough of supporting its debt or not by comparing it other with the Assets of the company or cash flows for the company, and the analysis can be made accordingly by the management of the company.
- It is easier for the company to calculate the B.V. of date using the formula mentioned as the value of all the components is available in the company’s balance sheet. So the value can be derived just by adding these components, including notes payable long-term liabilities and the current portion of the long-term liabilities. One can calculate the book value of debt.
- The market value of debt changes as per the market situations prevailing at a particular point in time, whereas the book value changes in case when there is any updation in the financial statements by the company only so; the calculation using the book value of debt gives the actual value of amount company owes to the others as recorded in the books of accounts of the company.
Disadvantage
The disadvantages of the book value of debt are provided and discussed below:
- The book value of debt does not provide the actual net value of the debt, considering the market value of those components prevailing at the time. So to find out the exact net position of the debt in the company, one has to calculate the market value of the debt.
- The book value of debt changes periodically by the company, quarterly, annually, or monthly as decided by the company’s management. So to know the exact, updated value of debt, one has to wait for the Updation of those financial statements.
Conclusion
Thus, the Book value of the debt comprises three components: notes payable amount, long-term debt, and the current portion of the long-term debt. This Book value is available on the company’s Balance Sheet under the Long Term Liability head and Current liability head, as the case may be. It is one of the useful measurements for the company’s liquidity ratios. Also, it is easier to calculate book value when compared to the market value of debt.
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