Some Common Methods of Valuation of Assets
Asset valuation is the process of determining the current value of company assets, such as stocks, buildings, equipment, brands, goodwill, etc. Valuation of various assets can be made by using different methods. Valuation of fixed assets can be made in different ways. Some of the major methods are as follows:
(1) Cost Method
In this method, the valuation of assets is made on the basis of the purchase price of the assets. It is the easiest way of asset valuation. It is done by basing the value on the price for which the asset was bought. It is a very simple method of valuation of assets. Sometimes, the existence of one asset depends on the existence of another. Then it is difficult to use this method.
(2) Market Value Method
Valuation of assets can be made on the basis of the market price of such assets. This method bases the value of the asset on its market price or its projected price when sold in the open market. But if the same nature of assets is not available in the market, it is very difficult to determine the value of such assets. So, there are two methods related to it. They are:
- Replacement Value Method – If the same asset is to be purchased then on the basis of the same value, the valuation of assets can be done.
- Net Realizable Value – It refers to the price in which such asset can be sold in the market. But expenditure incurred at the sale of such an asset should be deducted.
(3) Base Stock Method
This method requires a company to keep a certain level of stocks whose value is assessed based on the value of base stock. Under this method of valuation, the company should maintain a certain level of stock and valuation of the stock is made on the basis of valuation of base stock.
(4) Standard Cost Method
Some of the business organizations fix the standard cost on the basis of their past experience. This method uses expected costs instead of actual costs, often based on the company’s past experience. On the basis of standard cost, they make a valuation of assets and present in the balance sheet.
(5) Average Cost Method
It is a simple method for the valuation of such assets which cannot be distinguished. Like petrol, petrol is kept in the tank but e cannot separate its stock on the basis of a lot. So, the valuation of the stock is made adding to all the cost and dividing by the quantity.
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