Glossary · Also called Scrap value
Residual value
The amount an asset is expected to be worth at the end of its useful life.
What it means
The estimated disposal proceeds of a non-current asset at the end of its useful life, deducted from cost to find the depreciable amount.
Example
A machine costing RM30,000 expected to sell for RM3,000 has RM27,000 to depreciate over its life.
Why it matters
It affects the yearly depreciation charge, so a wrong estimate distorts both profit and the asset's carrying amount.
In practice
Residual value, sometimes called scrap or salvage value, is not a ledger account. It is an estimate that feeds the depreciation calculation. In the straight-line method it is deducted from cost before dividing by the useful life. It is the amount the business expects to recover when it disposes of the asset.
For a machine costing RM50,000 with an estimated residual value of RM5,000 over five years, only RM45,000 is spread as depreciation. The firm expects to get RM5,000 back at the end.
Do not confuse residual value with net book value. Net book value is cost minus accumulated depreciation at any point in the asset's life, and it changes each year. Residual value is a single forecast of worth at the very end of that life. If the asset is later sold for more or less than its net book value, the difference is a profit or loss on disposal in the income statement.
If depreciation calculations with residual value are slowing you down, one of our teachers can practise the steps with you until they are quick. Book a trial class.
Related terms
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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