Scrap value is the remaining worth of a machine, building or similar asset when it reaches the end of its useful life.
The scrap value is the amount someone would be willing to pay for a fixed asset once it’s no longer useful.
Examples of items with scrap value are an excavator that has succumbed to wear and tear, or an office space that is run-down and is no longer adequate to cover your business’ needs.
Scrap value can also be called residual value or disposal value. They’re all used for the value of an asset when it’s no longer in use, slated for disposal or scrapping, or abandoned.
How to find the scrap value
Identifying the scrap value is a standard practice when selling or scrapping an asset that’s no longer useful.
To find the scrap value of an item, we first have to look at depreciation. Depreciation is an accounting term used to describe a valuable asset’s loss of value over time. Depreciation is only used for fixed assets, which are assets above a certain value with a long lifespan, such as property or cars.
Depreciation is necessary because their value declines over time, and your accounts should be updated to reflect this.
Once the asset is fully depreciated, meaning that you’ve depreciated for as many years as it’s anticipated to last, the scrap value is what remains in your accounts.
For example, if you purchase a company car worth $20 000, which is expected to last 5 years and which you expect will drop its value by $3 000 every year, the scrap value after 5 years would be:
20 000 – (5×3000) = $5 000
Linear versus declining-balance depreciation
There are two ways to depreciate an asset: linear depreciation and declining-balance depreciation
With the linear depreciation method, you reduce an asset’s value by the same amount every year over its lifespan, as in the example of the car.
With the declining-balance method, depreciation is higher in the early years of the asset’s lifespan. This works well for assets whose value drops quickly over time, or that lose more value early on, such as phones and computers.
For example, if you buy a company phone for $800 that’s expected to last 5 years, it might lose half its value in the first year, so that it’s worth $400 in your accounts the second year you own it.