Salvage value, also referred to as scrap value or residual value, is an estimate of the value an asset will be worth at the end of its useful life. This amount is recorded on a company's balance sheet as the ending balance of the asset in the last year of its useful life. A common salvage value for an inexpensive asset with a long useful life would be zero, but some companies might also set a positive salvage value if they estimate that there is a possible resale value of the asset at the end of its life.

Why is Salvage Value Important?

Companies should never set the salvage value too high or too low, for the following reasons: When value is too high:
  • Company might understate its depreciation expense
  • Company could overstate its net income
  • It could also overstate the total fixed assets and retained earnings on its balance sheet
  When value is too low:
  • Company could overstate its depreciation expense
  • Company could understate its net income
  • One might understate its total fixed assets and retained earnings
  • It will have a lower debt-to-equity ratio and loan collateral, which could impact future debt financing or violate loan covenants that require minimum debt ratio levels from a company

Calculating Depreciation Based On Salvage Value

In the simplest case, a company that uses the straight-line depreciation method can take the purchase price of the asset, depreciation expense, and useful life to determine the salvage value. CFI Marketplace offers a straight-line depreciation method template which walks you through the calculation step by step.  

Learn More on This Topic

Read CFI's guide to learn the definition and calculation of depreciation based on the value. Feel free to check out CFI Marketplace's library of accounting templates to find tools for your accounting and finance duties!  
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