Market value - What is market value?

Market value is the estimated worth of an asset, based on how much a buyer would be willing to pay the seller.

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Although market value is affected by fluctuations within the market supply and demand, the true market value is what a buyer believes it is worth at a given point in time.

However, to determine the market value of an asset, it is assumed that both the buyer and seller have a comprehensive knowledge of the worth of the particular asset. A series of factors are taken into account when determining a proper market value based on standards in the open market.

Accounting records often don't reflect an asset's true market value. This is because the cost principle requires assets to be recorded at historical cost.

Which assets have market value?

Essentially, all types of assets have a market value. The most simple types of assets for which market value can be determined are stocks and bonds, which have a clearly delineated cash value.

Assets such as houses, cars, or business shares, for example, require a much more complex process for calculating the market value. Evaluation of these assets often needs the work of a specialist who is professionally trained in assessing value.

How market value works

Because the market value is based on the price someone is willing to pay, it is often influenced by the condition of the market.

For example:

John lists his car to sell at £10,000. However, there are no buyers interested in paying the £10,000 but he receives two offers for £8,000. In this case, £8,000 would be the market value.

Why market value is important

The future estimated market value of an asset could be something that should be considered before the initial purchase. Especially in the case of stocks and securities, the investment is made with the assumption (backed by understanding of the asset) of future value.

Market value of assets will also have an impact on tax, especially those that experience depreciation or amortisation.

Companies that have a market value under their book value are often appealing to investors as it indicates that these businesses might be undervalued.

Market value and Debitoor

The best way to gain an understanding of the market value of your business assets is to register them in your finances and track depreciation. With Debitoor, straight-line depreciation is automatically applied and calculated based on initial and residual value and the useful life of the asset.