In financial accounting, scrap value is associated with the depreciation of assets used in a business. In this situation, scrap value is defined as the expected or estimated value of the asset at the end of its useful life. Scrap value is also referred to as an asset's salvage value or residual value. The following example illustrates how the scrap value is used.
A business acquires equipment at a cost of $150,000 and estimates that its scrap value will be $10,000 at the end of its useful life of 7 years. The annual straight-line depreciation expense will be $20,000 [($150,000 cost minus $10,000 scrap value) divided by 7 years]. Accountants and U.S. income tax regulations often assume that for the depreciation calculation the asset will have no scrap value. (If cash is received when the asset is scrapped, any amount that is in excess of the asset's carrying value will be reported as a gain.)
In cost accounting, scrap value often refers to the amount that a manufacturer will receive from materials or products that will be scrapped.
