Accounting as a field of study involves determining the value of items owned. These items are called assets, and it is necessary to value them for several reasons. Valuation helps in knowing the amount of tax payable on assets. Someone can think of valuation as finding the real market value or fair value of an item. The value of an asset will be the amount that the asset can be sold or bought in an open market. Real assets are those assets having money value because of the materials they have and the value of materials.
Once that is done, the question of how real assets are valued can be answered. There are methods that can determine the worth of a real asset. The three ways that can be sought for real estate pricing are using income, using sales comparison, and using cost. These three approaches will give an approximate estimate of real estate value.
The income approach is used for real estate value determination because it is centered on rent. The idea behind this approach is to get the current worth of real estate based on the income a property earns. This income is then divided by the appropriate discount rate or cap rate. Net income is money that a property owner remains with after all expenses have been paid out. Information about expenses and incomes related to real estate is collected.
After this is done, an appropriate cap rate is chosen to be used in the calculation. The chosen rate should be derived from sales of similar estates. With all this data, all that remains is getting the value. This is done by dividing the net earnings by the cap rate.
For property that is not real estate, other methods are adopted, such as the cost method or market value method. Cars and ships can be termed as fixed assets. Before such assets are valued, some matters have to be considered. These matters include depreciation, remaining useful life, and salvage value. Depreciation is the reduction of value because of continuous use, while salvage value is the amount that an asset would be sold for when it achieves its purpose. Useful life is the period for which an asset is expected to be used before it becomes worthless.
To value cars, ships, or other similar assets, the original cost is subtracted from the accumulated depletion. This implies that depreciation has to be calculated before it is applied in pricing. The depreciation method chosen will depend on the asset type and results that are expected. The value received is called net book value or value after depreciation of the asset and is reported for taxation. An important point to note is that business property costing differs from personal property.
Valuation is important in accounting as it helps businesses know the real value of things owned. The choice of method applied will depend on preferences and the type of asset. Finally, valuation is a complex process requiring an accounting background and knowledge. Before engaging in self valuation, the services of a professional appraiser must be sought.