Definition of Salvage Value
In accounting, salvage value is the amount that is expected to be received at the end of a plant asset‘s useful life. Salvage value is sometimes referred to as disposal value, residual value, terminal value, or scrap value.
When calculating the depreciation expense of an asset, the expected amount of the salvage value is not included.
Example of Salvage Value
Assume that a plant asset has a cost of $325,000 and is expected to have a salvage value of $25,000 at the end of its 5-year useful life. The depreciable cost of $300,000 ($325,000 – $25,000) is divided by the 5 years of useful life to arrive at the straight-line depreciation expense of $60,000 for a full year or $5,000 per month ($300,000/60 months).
Accountants and income tax regulations often assume that plant assets will have no salvage value. This will result in an asset’s entire cost being depreciated during the years that the asset is used in the business. Any amount received that is in excess of the asset’s book value will be reported as a gain at the time it is sold.
