what is salvage value 
salvage value is the estimated book value of an asset after depreciation is complete based on what a company expects to receive in exchange for the asset at the end of its useful life as such an asset s estimated salvage value is an important component in the calculation of a depreciation schedule investopedia nono floresunderstanding salvage valuean estimated salvage value can be determined for any asset that a company will be depreciating on its books over time every company will have its own standards for estimating salvage value some companies may choose to always depreciate an asset to 0 because its salvage value is so minimal in general the salvage value is important because it will be the carrying value of the asset on a company s books after depreciation has been fully expensed it is based on the value a company expects to receive from the sale of the asset at the end of its useful life in some cases salvage value may just be a value the company believes it can obtain by selling a depreciated inoperable asset for parts companies take into consideration the matching principle when making assumptions for asset depreciation and salvage value the matching principle is an accrual accounting concept that requires a company to recognize expense in the same period as the related revenues are earned if a company expects that an asset will contribute to revenue for a long period of time it will have a long useful life if a company is not sure of an asset s useful life it may estimate a lower number of years and a higher salvage value to carry the asset on its books after full depreciation or sell the asset at its salvage value if a company wants to front load depreciation expenses it can use an accelerated depreciation method that deducts more depreciation expenses upfront many companies use a salvage value of 0 because they believe that an asset s utilization has fully matched its expense recognition with revenues over its useful life a company can change its expected salvage value at any time it just needs to prospectively change the estimated amount to book to depreciate each month depreciation methodsthere are several assumptions required for developing depreciation schedules there are five primary methods of depreciation financial accountants can choose from straight line declining balance double declining balance sum of years digits and units of production the declining balance double declining balance and sum of years digits methods are accelerated depreciation methods with higher depreciation expense upfront in earlier years each of these methods requires consideration for salvage value an asset s depreciable amount is its total accumulated depreciation after all depreciation expense has been recorded which is also the result of historical cost minus salvage value the carrying value of an asset as it is being depreciated is its historical cost minus accumulated depreciation to date straight line depreciation is generally the most basic depreciation method it includes equal depreciation expenses each year throughout the entire useful life until the entire asset is depreciated to its salvage value assume for example that a company buys a machine at a cost of 5 000 the company decides on a salvage value of 1 000 and a useful life of five years based on these assumptions the annual depreciation using the straight line method is 5 000 cost 1 000 salvage value 5 years or 800 per year this results in a depreciation percentage of 20 800 4 000 the declining balance method is an accelerated depreciation method this method depreciates the machine at its straight line depreciation percentage times its remaining depreciable amount each year because an asset s carrying value is higher in earlier years the same percentage causes a larger depreciation expense amount in earlier years declining each year using the example above the machine costs 5 000 has a salvage value of 1 000 a 5 year life and is depreciated at 20 each year so the expense is 800 in the first year 4 000 depreciable amount 20 640 in the second year 4 000 800 20 and so on the double declining balance ddb method uses a depreciation rate that is twice the rate of straight line depreciation in the machine example the depreciation percentage is 20 therefore the ddb method would record depreciation expenses at 20 x 2 or 40 of the remaining depreciable amount per year both declining balance and ddb require a company to set an initial salvage value to determine the depreciable amount this method creates a fraction for depreciation calculations using the example above if the useful life is five years the denominator is 5 4 3 2 1 15 the numerator is the number of years left in the asset s useful life the depreciation expense fraction for each of the five years is then 5 15 4 15 3 15 2 15 and 1 15 each fraction is multiplied times the total depreciable amount this method requires an estimate for the total units an asset will produce over its useful life depreciation expense is then calculated per year based on the number of units produced this method also calculates depreciation expenses based on the depreciable amount formula and calculation of salvage valuethere are several ways a company can estimate the salvage value of an asset first it may use the percentage of the original cost method this method assumes that the salvage value is a percentage of the asset s original cost to calculate the salvage value using this method multiply the asset s original cost by the salvage value percentage percentage of cost method original cost anticipated salvage value percentagecompanies can also get an appraisal of the asset by reaching out to an independent third party appraiser this method involves obtaining an independent report of the asset s value at the end of its useful life this may also be done by using industry specific data to estimate the asset s value companies can also use comparable data with existing assets they owned especially if these assets are normally used during the course of business for example consider a delivery company that frequently turns over its delivery trucks that company may have the best sense of data based on their prior use of trucks salvage value is almost never exactly known in advance unless there is a contract in place for the sale of the asset at a future date it s usually an estimated amount salvage value vs other valuessalvage value is the estimated value of an asset at the end of its useful life it represents the amount that a company could sell the asset for after it has been fully depreciated on the other hand book value is the value of an asset as it appears on a company s balance sheet it is calculated by subtracting accumulated depreciation from the asset s original cost the balance sheet reports the book value not the salvage value salvage value is also similar to but still different from residual value in some contexts residual value refers to the estimated value of the asset at the end of the lease or loan term which is used to determine the final payment or buyout price in other contexts residual value is the value of the asset at the end of its life less costs to dispose of the asset in many cases salvage value may only reflect the value of the asset at the end of its life without consideration of selling costs last salvage value is most comparable to scrap value there may be a little nuisance as scrap value may assume the good is not being sold but instead being converted to a raw material for example a company may decide it wants to just scrap a company fleet vehicle for 1 000 this 1 000 may also be considered the salvage value though scrap value is slightly more descriptive of how the company may dispose of the asset example of salvage valueimagine a situation where a company acquires a fleet of company vehicles the company pays 250 000 for eight commuter vans it will use to deliver goods across town if the company estimates that the entire fleet would be worthless at the end of its useful life the salve value would be 0 and the company would depreciate the full 250 000 let s say the company assumes each vehicle will have a salvage value of 5 000 this means that of the 250 000 the company paid the company expects to recover 40 000 at the end of the useful life to appropriately depreciate these assets the company would depreciate the net of the cost and salvage value over the useful life of the assets the total amount to be depreciated would be 210 000 250 000 less 40 000 if the assets have a useful life of seven years the company would depreciate the assets by 30 000 each year 