Introduction

Book profit is a term used in accounting and finance to describe the unrealized gains or profits on an investment or asset based on its current market value compared to its original cost. It represents the difference between the market value of an investment and its book value, which is the original purchase price adjusted for depreciation or amortization.

In this article, we will delve into the concept of book profit, how it is calculated, and provide numerical examples to illustrate its application.

Calculating Book Profit

The formula to calculate book profit is as follows:

$\text{Book Profit}=\text{Market Value of Investment}-\text{Book Value of Investment}$

Where:

• Market Value of Investment: The current market value of the investment or asset.
• Book Value of Investment: The original cost of the investment adjusted for any depreciation, amortization, or impairment.

Numerical Example 1: Stocks

Let's consider a scenario where an investor purchased 100 shares of a company's stock at $50 per share. The investor's total investment cost is $5,000 (100 shares × $50 per share). After some time, the market price of the stock increases to $70 per share. Now, we will calculate the book profit.

Market Value of Investment=Number of Shares×Current Market Price per Share

$\text{Market Value of Investment}=\text{Number of Shares}\times \text{Current Market Price per Share}$ \{Market Value of Investment} = 100 \times $70 = $7,000

The book value of the investment remains the same as the original cost, as there have been no depreciation or amortization adjustments.

{Book Value of Investment} = {Total Investment Cost} = $5,000

Now, we can calculate the book profit:

Book Profit=Market Value of Investment−Book Value of Investment

$\text{Book Profit}=\text{Market Value of Investment}-\text{Book Value of Investment}$ 

Book Profit = $7,000 - $5,000 = $2,000

In this example, the book profit on the investment in the company's stock is $2,000.

Numerical Example 2: Real Estate

Consider another scenario where an individual purchases a residential property for $300,000. Over time, the property's market value appreciates, and its current market value is assessed at $400,000. No depreciation or amortization is applicable in this case.

{Market Value of Investment (Property)} = $400,000

The book value of the investment remains the same as the original cost.

{Book Value of Investment (Property)} = $300,000

Now, we can calculate the book profit:

Book Profit=Market Value of Investment−Book Value of Investment

$\text{Book Profit}=\text{Market Value of Investment}-\text{Book Value of Investment}$ 

Book Profit= $400,000 - $300,000 = $100,000

In this example, the book profit on the residential property investment is $100,000.

Conclusion

Book profit is an important concept in accounting and finance, representing the unrealized gains on an investment or asset based on its current market value compared to its original cost. It helps investors and businesses assess the performance of their investments and make informed decisions.

Calculating book profit is a straightforward process, involving comparing the market value of the investment to its book value. The examples provided illustrate how book profit can be calculated for investments in stocks and real estate.