Valuation principles are very important in the field of finance. A student belonging to commerce and accounting enjoys learning valuation. But before moving to valuation principles, first of all, it is important to learn about the valuation.
Valuation and Its Principles
Valuation is an estimation that is especially done by a professional or a valuer. To determine the fair price or costs of a property such as a building, factory, land, etc is the reason for the need for valuation.
Valuation is a complex task and in addition, it is very important for any certified accountant to understand. Besides that, it is very important to be familiar with the basic principles of the valuation.
The process of valuation defines the present value of an entity. The selling price or income factors do the valuation. Value of any entity depends on this life, efficiency, structure, maintenance, location, bank interest, etc.
The process of making an estimate of the worth of real property or real property or other assets for a particular purpose eg.letting, purchase, sale, audit, rating, compulsory purchase or taxation.
That purpose and the relevant circumstances will determine assumptions and facts that are appropriate and hence the process used.
Determining the value of an individual’s assets is very necessary when dividing property among beneficiaries of a will or during a divorce settlement.
It can also be necessary for those required to forfeit assets as a result of a civil claim or as part of bankruptcy proceedings.
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New information can’t re-state a valuation. However, market shares fluctuate every day, every minute or even every second. Value of a particular asset or capital amount varies with time.
For example, you have a cash amount of $10,000. You have locked them in your safe for 5 years. After 5 years, you will experience a fall in their value as compared to their value 5 years ago. This makes a loss for you.
Accepted Valuation Principles
Many companies buy assets to make profit foreseeing a rise in their market value. The cost of the asset is based upon some pacts. If buyers and sellers agree on the terms, asset stands sold.
Four Types of Accepted Valuation Principles
1. Historical Cost
2. Current Cost
3. Realizable Value
4. Present Value
As the name suggests, Historical Cost is the same as the value of the asset bought. No matter how many years pass by, the value remains the same. In short, the selling price is now cost price.
Current Value means an asset is purchasable in the ongoing market price. That is, no matter how old the asset is, it is sellable in current value. The only condition is- the specifications must be the same.
Realizable value is the value at which the seller and buyer finalize the deal. No hard terms and conditions apply here. If the seller makes no objection, an asset is sold.
Present Value is the price fixed by a seller to sell the asset immediately. The seller estimates the future expected price. And therefore, sells the asset at some discount.
Interests and Valuation
With the passage of time, interests on assets add up. To sell an asset at Historical Cost, interest becomes zero and is termed as ‘loss’. Whereas if the asset is sellable at Current Cost, there is no profit and no loss. This means both the Cost Valuations provides a null profit.
What do we do?
If the asset is really in good condition or you acquire willing power, Value your asset at Historical Cost. Add the necessary interests. And make a profit out of it. Besides that, accounting is a fair means of business. And Valuation Principles are its foundation. Follow them as they are.
- Liquidity takes control over value– Liquidity and value are directly proportional to one another. The higher the liquidity of a company, the higher its value should be.
- Minority Interest Value < Majority Interest Value – The minority interest don’t have the power of influence. This is what brings in the minority discount in their pockets.
Property valuation or land valuation is the process of developing an opinion of value, for real property like market value.
Importance of Valuation
Certainly, it helps in the overall growth of an economy. By imparting a balanced knowledge about how can you sell assets at profitable rates.
From my point of view, understanding of Valuation Principles is not a big deal. Rather an easy and approachable way to increase business.
Things to keep in mind:
- Set a value you find viable for the asset.
- Don’t settle for less until necessary.
- Markets are another word for fluctuations. Great deals may come and go. Give priorities to assets as they deserve.
Solved Questions for You
Question: What is valuation?
Answer: Valuation is a calculation of worth of something in the monetary terms which are essential for maintaining records in Accounting
Question: What is the importance of valuation?
Answer: To determine the fair price or costs of a property such as a building, factory, land, etc is the reason for the need for valuation. It is very necessary when there is a need to divide property among beneficiaries of a will and also, during a divorce settlement. It can also be necessary for those required to forfeit assets as a result of a civil claim or as part of bankruptcy proceedings.