Residual value - What is residual value?
Residual value is an estimate of how much an asset will be worth once it is no longer useful to a business.
Debitoor invoicing software makes it easy to track the value of your assets. Find out more about managing company assets in Debitoor.
Residual value may also be referred to as salvage value, disposal value, or scrap value.
Why is residual value important?
In accounting, the cost of a fixed asset is recorded as a repeat expense across its entire useful life rather than as a one-off cost. This process is called either depreciation or amortisation, depending on the nature of the asset:
- Depreciation is the method of expensing tangible assets over time to show their decline in value.
- Amortisation is the corresponding concept for intangible assets such as website domains, goodwill and intellectual property.
To accurately calculate depreciation or ammortisation of an asset, you need to know how much the asset cost when it was initially purchased; how long it is expected to be useful or operational; and how much the asset will be worth once it is sold, disposed of, or otherwise no longer useful to your business.
How to calculate residual value
Many assets have a residual asset of £0, particularly assets which are expected to be kept until they break or assets which cannot be sold on.
If you expect to sell the asset at the end of it’s useful life, the residual value will be how much you can expect to sell it for. If you are expecting to sell the asset at a later date, you should calculate the residual value by considering how factors such as wear and tear and new advances in technology will affect the value of your asset.
If it is too difficult to determine a residual value or if the salvage value is expected to be minimal, you do not have to include residual value in amortisation or depreciation calculations.
Instead, you can depreciate the entire cost of the fixed asset over its useful life. If the asset ends up having any residual value, this should be recorded as a gain. If the residual value is less than originally calculated, the difference should be recorded as a loss.
Residual value in Debitoor
With Debitoor invoicing software, it’s simple to track the value of your fixed assets. When you create a new expense, you have the option to mark it as an asset. Next, enter the residual value and expected lifespan of the asset, then leave Debitoor to do the rest. Using straight-line depreciation, Debitoor will automatically spread the cost of the asset over its useful lifespan.