What Is Salvage Value?

Salvage value is the estimated resale value of a fixed business asset after accounting for depreciation. As it relates to your business, salvage value is important to track and calculate because it’s used to calculate depreciation and helps you to determine your company’s most accurate value.

Understanding salvage value and its role within depreciation and business valuation is critical, so let’s take some time to dive into this accounting term.

How Do You Calculate Salvage Value?

Salvage value is an estimate of a fixed asset’s market value at the end of its useful life. Every business or accountant will have their own approach to estimating the value of an asset—with some depreciating to $0 if they expect its value to be negligible. 

Conceptually, salvage value is merely what your business expects to earn if you were to resell an asset after you’re finished using it. There’s no specific formula for calculating salvage value, but a business should have a standardized process for depreciating its assets and recording their book value.

What’s an Example of Salvage Value?

Let’s say your restaurant purchases an ice cream machine for $50,000 and plans to keep that machine for 5 years, at which time it would resell the machine for $10,000. Your accountant would depreciate $40,000 across 5 years—leaving the remaining $10,000 as the salvage value.

Why Is Salvage Value Important for Depreciation?

Salvage value is part of every depreciation method and required for accurately valuing your assets and business. Companies have several options for depreciating assets on their books, but the most popular is the straight-line depreciation method.

This depreciation method is the most common because of its simplicity. You calculate the depreciation value of an asset and expense it equally through the useful life of that asset until you reach its salvage value. 

The formula for straight-line depreciation is:

(Original Cost – Salvage Value)/Useful Life = Depreciation Value

If we used straight-line depreciation with our previous example, the depreciation expense on the ice cream machine would be:

($50,000 – $10,000)/5 years = $8,000 every year

Other popular depreciation methods include declining balance, double-declining balance, sum-of-years digits, and units of production. Regardless of the method you use for building your depreciation schedule, you will need to calculate salvage value.

What Is Residual Value?

Salvage value is also sometimes referred to as residual value, but it means the same thing: the estimated value of an asset at the end of its useful life. 

What if You Can’t Resell at Salvage Value?

Sometimes businesses don’t intend to resell an asset or can’t sell it at the end of its useful life. Reselling the asset is not required for depreciating it or calculating its salvage value for accounting purposes. 

In fact, some companies will set their salvage value at $0 if they don’t believe it will have value at the end of its life. Other instances will have businesses use a salvage value based on what they believe the parts of the fixed asset would be worth if the asset were stripped down to its pieces.

Salvage value is an important component of depreciation, which is an important part of asset valuation for accounting purposes. If you’re looking to gain more control of your business’s finances and improve your bookkeeping, then consider taking advantage of the resources and tools available from Lendio.