Question

There can often be significant differences between the book value and market value of items on a balance sheet. Which section of the balance sheet often sees the largest differences?

Answer 1

There are two sides of the Balance Sheet, Assets (Application of Funds) side and Liability (Sources of Funds) side. Due to regular valuations, the Assets side is more or less correctly valued with Short term assets more correctly valued than long term assets.

On the Liability side, there is Debt and Equity, Debt , if raised through bonds is more or less correctly valued as per the current YTM, and a little less correctly valued if raised throuh loans. Again Short term Debt more correctly valued than long term Debt.

It is the equity whose market value generally has the most significant difference as compared to its book value. This is because book value reflects what has currently and previously happened, i.e. only historical information is reflected. However, the market value is ascertained from the future possibilities, future profits and opportunities. Thus, it can be seen many times that startups,whose book value of equity is negative, are also valued very high in the market.

Thus equity portion (Liability side) has the most significant differences between the book value and market value.