Accountancy · Ch 7 — Depreciation, Provisions and Reserves
Estimated Net Residual Value
Estimated Net Residual Value
The Core Idea: What You Actually Get When You Sell
Depreciation is meant to spread the cost of an asset over its working life. But you don't lose the entire purchase price. At the very end, you usually sell the asset for something — maybe as scrap metal, a second-hand machine, or spare parts. That final cash you expect to receive, after paying for the hassle of getting rid of it, is the Net Residual Value.
Think of it this way: the asset's total cost to the business is not the purchase price. It's the purchase price minus what you expect to get back at the end. That difference is what you actually depreciate.
The Definition and the Two Names
The textbook gives this asset's final worth three names, all meaning the same thing for accounting:
- Net Residual Value
- Scrap Value
- Salvage Value
It is formally defined as the estimated net realisable value of the asset at the end of its useful life. The word "net" is critical here. You do not simply guess what you can sell it for. You must subtract the costs of selling it — transportation, auction fees, dismantling charges, broker commission.
Net Residual Value = Estimated Sale Value − Estimated Disposal Expenses
The Worked Example from the Book
The textbook uses a clear, step-by-step illustration.
A machine is bought for ₹50,000. Its useful life is estimated at 10 years. At the end of the 10th year, the business expects to sell it for ₹6,000. However, to get it out of the factory and to a buyer will cost an estimated ₹1,000 in dismantling and transport.
| Item | Amount (₹) |
|---|---|
| Estimated Sale Value (at end of life) | 6,000 |
| Less: Estimated Disposal Expenses | (1,000) |
| Net Residual Value | 5,000 |
So the business expects to recover ₹5,000 in cash, net of all costs, when the machine is finally disposed of.
The Accounting Consequence: What Gets Depreciated
This is the most important practical point. You do not depreciate the full ₹50,000. You only depreciate the amount that will be "consumed" or "used up" over the asset's life.
Depreciable Amount = Cost of Asset − Net Residual Value
For the example above:
Depreciable Amount = ₹50,000 − ₹5,000 = ₹45,000
This ₹45,000 is the total depreciation that will be charged over the 10 years. The ₹5,000 residual value sits on the books as a kind of "recoverable" amount — it is not expensed. When the asset is finally sold, if the actual sale proceeds (net of expenses) equal the estimated residual value, there is no profit or loss on disposal. If they differ, a gain or loss arises at that point.