Residual Value Definition and Calculation

Understand residual value as well as finding out how it is defined, calculated and why it matters in accounting.

1. What is Residual Value?

Residual value is the estimated value of a fixed asset at the end of its useful economic life. Say, for example, a business purchases equipment for £10,000 which it estimates will be in use for 10 years at which point the scrap value will be £4,000 – the residual value in accounting will be £4,000.

Residual Value Definition

2. How to Calculate Residual Value

Residual value, to some extent, is subjective because it requires making an estimate of how much something is worth in the future. There are no set rules to follow when it comes to determining residual value. To calculate the residual value of an asset you should consider:

  • The type of asset being assessed
  • The residual values of similar assets in the current market
  • How the business intends to use the asset (heavy use may indiciate a lower scrap value)
  • The investment the business intends to spend to maintain the asset over the years it is using it (better maintaince may improve scrap value)

3. Why Does Residual Value Matter in Accounting

Residual value affects depreciation calculations in accounting. Depreciation calculations are based on the cost of the asset minus residual value. So using the example above, if the business uses straight-line depreciation over 3 years on its equipment depreciation will be calculated on £6,000 (£10,000 – £4,000).

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Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - a website full of templates, guides and resources for UK sole traders. No faff. No confusion. Just simple straightforward advice on business registration, taxes and bookkeeping.