Definition: The residual value is the amount that a company expects to receive for an asset at the end of its service life less any anticipated disposal costs.
In accounting, the residual value is an estimated amount that a company can acquire when they dispose of an asset at the end of its useful life. In order to find an asset’s residual value, you must also deduct the estimated costs of disposing the asset.
The residual value of an asset is usually estimated as its fair market value, as determined by agreement or appraisal.
For example: Let’s say a machine costing $15,000 has an estimated service life of 10 years, and at the end of its service life it can be sold as scrap metal to the dump for $2,000. If the cost of transporting the machine to the dump is $100, then the residual value of the machine is $1,900 ($2,000 value – $100 transportation costs).
If a fixed asset is depreciated over its useful life, then the asset’s residual value is the lowest value that it can be depreciated to.
If we take the machine from the example above for example, and depreciate it using the straight-line method, then we must first subtract the estimated residual value of $2,000 from the acquisition price of $15,000 before beginning depreciation.
The $13,000 remaining can then be divided and depreciated over the service life of the machine.
In the Reviso accounting application, the residual value is applicable when working with fixed assets.