Book value and Market value define the value of a product or service. However, most people have difficulty understanding the difference between Book value and Market value, possibly due to their similarities.
The major difference between Book value and Market value is that the former concerns the product’s cost. In contrast, the latter is concerned with the price of a product set as per the market situation.
- It is the value of a product that comprises all the costs incurred in producing the concerned product.
- It is named Book value because the evidence of it can be found in an organization’s books of accounts or financial records.
- One of the major characteristics of this value that distinguishes it from Market value is that it is concerned with only tangible assets or products, meaning it only considers the things that can be seen and touched.
- In comparison with Market value, it does not change. The costs incurred in making any product will not keep fluctuating.
- A product can have a high Book value and a low Market value.
- The value of a product is set as per the market situation.
- It is named Market value because it is the market that influences the price of it largely depending on demand and supply.
- What distinguishes Market value from Book value is that it is concerned with tangible and intangible products, meaning it considers the products or services that can not be seen or touched.
- Compared with Book value, it keeps changing as the market situations change.
- A product can have a high Market value and a low Book value.
Comparison Between Book value And The Market value
|Parameters||Book value||Market Value|
|Meaning||It refers to the real value of a product or an organization. It is defined after considering all the costs incurred while making a product or organization.||It refers to the maximum value consumers are willing to buy the concerned product. It defines how well a product or organization is doing in the market.|
|Named so||It is named so because all types of costs incurred in making a product or organization are listed in an organization’s financial or accounting books.||It is named so because it defines the value of a product as per the market situations and forces. It defines the value of a product by taking its performance in a market.|
|Represents||It represents a product’s or an organization’s real value. It does not matter what their Market values are. It can also be said that it represents the equity of a firm.||It represents how well a product or organization performs in the market. It does not matter what their Book value is.|
|Products||It only considers the tangible product, which means the products that can be seen and touched.||It considers not only tangible products but also considers intangible products, which means the services that can not be seen or touched.|
|Market situations||Market forces do not influence the book value of any product or organization.||Market situations play a vital role in determining the market value of any product or organization. Demand and supply forces influence market values and consumers’ tastes and preferences.|
|Factors||Any factor does not influence it.||It is influenced by various factors, such as rising demand for a product as prices decrease. On the other hand, the supply of a product rises as the prices rise, and vice versa. Along with this, it is also influenced by consumers’ tastes and preferences.|
|Control||It can be controlled. For example, manufacturers can appoint low-wage people as laborers, buy cheap raw materials, purchase expensive machinery, etc.||It can not be controlled as the Market value of a product or organization depends upon the market situation. And no one has control over the market forces.|
|Fluctuations||There are no fluctuations in Book value as the cost of various products have already been incurred.||There are many fluctuations when it comes to Market value. This is because the market is dynamic and influenced by many changing factors. Hence, so do the prices.|
Major Differences Between Book Value And The Market Value
What exactly is Book value?
Book value refers to the value of a product that includes all the costs incurred in making the concerned product. For example, the product price in an organization’s financial books refers to the product’s Book value.
However, it should be noted that it only includes tangible products and does not include intangible services. It defines the real worth of an asset. Hence, there are no fluctuations in an asset’s or product’s book value.
Features of Book value
- It involves all the costs that were incurred in the production of a product. Since it shows the real value of a product, it should be noted that the Book value of a product does not fluctuate.
- The book value of any product can be stated as per an organization’s financial books.
- Market situations have no impact on any product’s Book value.
- It is only concerned with tangible products. It does not take into account intangible services.
- It can be controlled as one can limit or exceed prices involved in producing a product.
- The following are the formulas to calculate Book value:
- Book value of a product: Total cost – Accumulated Depreciation.
- Book value of an organization: Total assets – Total liabilities.
What exactly is Market value?
Market value refers to the product value determined by the Market forces. It does not matter what a product’s or organization’s Book value is. The market forces, such as demand and supply, will only influence its Market value.
Unlike Book value, Market value concerns tangible and intangible products and services. The market is dynamic. Thus the prices of products and assets keep on fluctuating.
Features of Market value
- It involves pricing goods and services per the market forces and situations. Since the market is dynamic, meaning it keeps changing, the Market value of products and services also keeps fluctuating.
- Financial records or Book value do not impact a product’s Market value.
- Along with tangible products, it also takes into account intangible services.
- Factors such as supply, demand, consumer tastes, preferences, etc., play an important role in determining a product’s Market value.
- It can not be controlled by anyone as Market situations are not in anyone’s hands.
Contrast Between Book value And The Market value
- Book value: refers to all the costs incurred in making a particular asset or product. It tells a product’s or organization’s actual value irrespective of its Market value. A product may have a high Book value and a low Market value.
- Market value: refers to the value of a product or service as determined by Market forces. It helps state where the product stands in a Market irrespective of its Book value. For example, a product may have a high Market value and a low Book value.
- Book value is named Book value because it is an organization’s financial or accounting books that state a product’s or organization’s actual value. In addition, financial books have a record of every cost incurred in the process of making the concerned product or asset.
- Market value – It is named Market value because it is the Market and its forces that determine a product’s or service’s Market value.
- Book value represents an organization’s or a product’s actual value. It can also be said it represents an organization’s equity. It does not matter where the concerned product or organization stands in the market, but what matters is all the cost people had to bear to make the product or organization possible. Hence, Book value represents nothing but the above motive.
- The market value represents where a product or organization stands in the market. A person can spend lots of money, but all of that can go in vain if the product or organization fails to register a Market value. It denotes the maximum value of a product that the consumers in the market are ready to buy.
- Book value – The major drawback of Book value is that it only considers tangible products meaning the products that can be seen and touched. It has no place for intangible services.
- Market value – One of the classic benefits of Market value is that it considers tangible products and considers intangible services. Because a service might not have a Book value, it has a Market value.
- Book value – Any factors do not influence it.
- Market value- is influenced by various factors, such as a market’s demand and supply forces and consumers’ expectations, tastes, and preferences. The demand for any product has an inverse relationship with price. As price rises, demand decreases, and vice versa. The supply of any product has a direct relationship with price. As the price rises, supply increases, and vice versa. Consumer expectations, tastes, and preferences also determine a product’s Market value; if consumers are no longer willing to buy a product, its Market value will continue to decrease.
- Book value- only concerns the costs incurred in producing a particular product or organization. Therefore, market situations have no impact on any product’s book value.
- Market value – Market situations significantly impact a product’s Market value. Many factors, such as demand, supply, consumer expectations, tastes, preferences, etc., impact market situations.
- Book value – Surprisingly, the Book value of a product or organization can be controlled. For example, one manufacturer might get raw materials cheaper than others due to his budget. Therefore, he has full control over the money he wants to incur in producing a product.
- Market value – Unlike Book value, Market value can not be controlled. The market is dynamic, and it keeps on changing. There are always changes in demand and supply matters and consumers’ tastes and preferences. All of these factors result in changes in the prices of products and services. And hence, Market value can never be in someone’s control.
Fluctuations in pricing
- Book value – There are no changes in a product’s or organization’s Book value. This is because the amount incurred in making a product or organization can not change. Thus, there are not any fluctuations in this.
- Market value – The market value of a product or organization is full of fluctuations as it is influenced by many factors, such as demand, supply, expectations, taste, and preferences that keep on changing. Changes in those factors result in changes in pricing.
Book value and Market value refer to two different kinds of value of a product or an organization that is often confused with one another. However, both terms sound like synonyms and are considered very similar.
The major distinction between Book value and Market value is that the former shows the actual value of a product or organization. In contrast, the latter shows the maximum price consumers are willing to pay.
FREQUENTLY ASKED QUESTIONS (FAQs)
Q1. Why can Market value not be controlled?
Market value can not be controlled because it depends on many factors that are not in anyone’s control. For example, a product can be top-notch and may have a low Market value because consumers’ tastes and preferences have changed.
Q2. What do Market value and Book value depict?
The former is concerned with depicting the true worth of a product. While the latter is concerned with depicting how well a product is performing in a Market and the maximum price consumers are willing to pay.
Q3. Why is Book value named Book value?
It is named so because all the costs of making a product or organization are listed in a company’s accounting or financial books.
Q4. What are some of the factors that influence Market value?
Various factors such as demand and supply forces, consumer expectations, tastes, and preferences play a vital role in determining a product’s or organization’s Market value.
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