Salvage value – What is salvage value?
Salvage value is the amount that an asset is worth at the time it is no longer useful or operational for your business after applying depreciation over its useful life.
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Salvage value (also often referred to as ‘scrap value’ or ‘residual value’) is the value of an asset at the end of its useful life.
In other words, if equipment is purchased for the purposes of your business, it should be marked as an asset. Over time, due to usage or new technology, this asset begins to lose value, and this is tracked through depreciation.
The amount that the product is worth at the end of its ‘useful life’ (when it no longer functions properly, or when it is no longer needed for your business) is the salvage value of that particular asset and can be taken into consideration for the resale price or write-off (if applicable).
How salvage value is determined
Because the salvage value is based on the worth of the product at the end of the period it is used for your business, tracking the depreciation of the value begins with the purchase price. This acts as the beginning value.
This means that even if you have bought an asset second-hand, machinery or computer hardware, for example, your purchase price is the value at the time of acquisition of the asset. When setting up depreciation, this is the amount needed to begin applying the depreciation method.
For example: A photographer purchases a new specialised DSLR camera for £1,249. Because this relates specifically to his business, it can be marked as an asset. When entering the starting value of the asset, they would enter the price paid at purchase (£1,249).
If they estimate that they will use that camera for 7 years, after which time they are likely to purchase a newer camera due to technological advancements, etc., this time period can be entered for depreciation purposes. Depending on the depreciation method used, the value of the camera at the end of those 7 years is the salvage value of that asset.
Depreciation and salvage value
There are several different methods for tracking the depreciation of an asset. The most common method is known as ‘straight-line depreciation’. In this method, the type of asset is taken into consideration. For example, electronics depreciate faster than other types of assets due to the rapid pace of advancements.
The importance of salvage value
Keeping track of the depreciation of your assets has a clear significance in your business finances. It is a crucial part of evaluating the value of your business, especially when you sell or write-off the asset as it is generally marked as a gain and has an impact on your tax filing.
Salvage value and Debitoor
With accounting and invoicing software like Debitoor, entering an asset and applying depreciation is simple. When you designate an expense as an asset, the software automatically applied straight-line depreciation based on the purchase value, allowing you to determine the eventual salvage value.