It is the value of an asset that ends when its value is lost after having been used during certain years of life. Assets have values that are constant, over time they lose that value due to the time that passes. The residual value is a fixed asset that consists of the estimation calculation which will be its value when it is no longer used again.
Finding the residual value is not difficult, it simply depends on a few factors. The first is established on the idea that if the asset will have some type of value once its useful life has ended. To summarize this, in case it can be sold for later use, as is the case with a machine or a cart for example. In the case of companies located in buildings, it always maintains a high residual value. In general, the longer you have an asset in use, the higher its residual value.
The residual value is divided into two types of lives by which said asset can be evaluated, for example:
Useful life: is the period of time during which a company can use the depreciable asset or the number of production units that it expects to be obtained.
Economic life: is the period of time in which the asset is expected to be usable by one or more people or the number of production units that can be obtained from said asset. In the case of revertible assets, in which their useful life coincides with the conventional period when it is less than the economic life of the asset.
Residual value characteristics:
- Estimate having an asset for its sale or other form of disposal.
- The residual value is considered once the useful life of the asset has elapsed.
- It varies depending on one asset to another, its depreciation or amortization also matters.
Calculation of residual value:
- The first step is the analysis of the asset and if it will have any kind of value in the market once its useful life is over.
- It is also considered whether an asset can be used multiple times at the end of its life and whether it has a high business value.
- Finally, the high residual value is calculated by the deduction of the sale price in the expenses necessary for the sale of this.
