What is appraisal in accounting?

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An appraisal is the process of conducting a fair analysis to evaluate an asset, a business, an organization or a performance based on certain standards. A qualified person called an appraiser does appraisal. It is done whenever properties need to be sold and its value is determined for tax obligations for a business.

Types of appraisal include

  • Business assets − Mainly, this type of appraisal is done at the time of ceasing operations. Book value is determined. In this business, liabilities are subtracted from its assets.

  • Capitalization − This is the most common method used by appraisers. In this method, past earnings are analysed. Weight of earnings will be given based on time of record of document. Present earnings will be given more weight than past earnings.

  • Future earnings − In this method, future earnings are considered. In both, capitalization method and future earnings method weight is given to present earnings than past earnings.

  • Capitalization factor − Required rate of return is divided by 100.

Importance of appraisal is explained below −

  • Buying and selling − Accurate value of business is determined in order to merge, buy or to sell the company or companies.

  • Legal disputes − In order to settle legal issues in a business, courts will look after appraisal value to settle the issues. To re-allocate, sell or to liquidate assets appraisal value is considered.

  • Intellectual property − Intangible assets are also appraised because, it increases the value of business.

  • Tax liability − Based on monetary value, taxes are collected. More the monetary value more the tax to be paid.

  • Funds − In order to attract investors or to raise funds for business appraisal value is calculated. The more the value it can attracts funds to the business

Updated on 29-Sep-2020 13:54:05