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Understand What Residual Value Means

Scholasticus K
Appropriate valuation of an asset by appropriate amortization or depreciation is an important aspect of balance sheet preparation. An often repeated query in this context is the correct residual value of any item. Here is some information on this matter.
Depreciation also known as the wear and tear of a particular fixed asset, is of course, inevitable, and it results into a loss of that perticuler commodity.
There are several significant definitions and meanings that can be put forth to convey the significance of the residual value. The following are some prominent ones...
1. Residual value of an asset is the left over value after depreciation, the book value of the asset, and can be expressed in monetary terms.

2. Residual value is the monetary value of an asset that is recorded in the balance sheet at the end of every year. In accounting terms, this value is a monetary value for the asset that has been sold or can be sold.
3. From the point of view of lease transactions, this value is the remainder value of the leased asset, after the expiry of the lease. It is the total sum for which the lessee (a person who takes the asset on lease) can purchase the leased asset from the leases giver.
To make a long story short, as the name itself suggests that the residual value is the remaining amount of monetary value of a said asset, after a certain time period.

Residual Value in Accounting

In the field of accountancy, depreciation is a deduction made in the book value of every fixed asset at the end of a fiscal year. Depreciation is basically an expenditure or a decrease in the value of a particular asset that results, due to the use of the asset. Gradually, over the period of time the asset becomes 'old' due to its use and wear and tear.
Depreciation (which is also known as the amortization) is deducted form the book value of the asset at the end of the fiscal year and is usually, expressed in terms of percentage. Financial accountants treat this as an expenditure, and deprecation of all assets is shown in the loss column in the Profit and Loss Account of the Final Accounts.
In the balance sheet, the prescribed value of depreciation is deducted from the assets and the value arrived at is the residual value. For example, if a particular company has an asset worth $5,000 with a depreciation rate of 10%, then the residual value of that asset at the end of first fiscal year is $4,500.

A Few FAQs

Some of the common questions have been discussed in the following paragraphs.
☛ What is Residual Value of an Asset?
As mentioned before, it is the value after depreciation of an asset. In some cases people also consider the sale value of an asset as the residual value.
☛ What is Residual Value in a Lease?
This is a bit different concept than the normal or rather usual residual values. When an asset is leased, the lessee pays a particular amount to the lease giver. In the process of usage, the lessee uses up a particular value of the asset, say 40%.
Thus in such a case, the residual value becomes 60%. However, at the same time he is paying say, 50% of the total asset value in rent. Therefore, if one is considering the resale value of the asset to be the residual value of the asset at that point of time, then the residual value becomes 50%.
On the whole, this type of value can have two parameters, namely the value after depreciation and the value of resale. Organizations and individuals use the parameter that they find suitable and convenient.