What is Residual Value, Important Role and Benefits
Rancakmedia.com – Have you ever heard of the term residual value? It sounds foreign, in this article we will discuss it so you can understand the meaning of this value.
Every asset or object that has been used by the company will definitely experience depreciation, and the residual value can be used to calculate this decrease.
Therefore, the residual value plays a role in calculating the depreciation of the estimated value of fixed assets and the economic life that has been used previously.
The determination of residual value also helps in depreciating fixed assets when their values are rendered ineffective. As a result, the company has two choices, sell the asset or stop using it.
Calculation of the value in it will be able to be done so that the documentation of financial transactions is more orderly and transparent. It is important to note that certain fixed assets have no residual value.
What is Residual Value?
Residual value it is a value that is always closely related to depreciation expense, as we briefly explained before. But what does residual value mean in an accounting context?
Residual value is the price that might be obtained from a current entity in consideration for disposal of the asset, less the anticipated costs of disposal and assuming that the asset has reached the age or condition expected at the end of its useful life.
Other experts argue that the residual value is the value of an object after the end more often calculate the residual value by removing fixed expenses from the original purchase price of a value.
From the two examples given above, we can conclude that residual value is the resale value of an asset at the end of its useful life.
Understanding Residual Value in the World of Accounting
As mentioned in the explanation above, this residual value is a value that is closely related to the depreciation cost of the company's assets. This calculation method is commonly used in large and small companies.
Residual value is also closely related to the company's annual financial statements. Therefore, the accountant in charge of the company must make continuous calculations every year.
What exactly is residual value in accounting? So, residual value is an estimate of the value or amount that will be received by the company at that time.
On disposal of an asset, after deducting the estimated costs of disposal, when the asset has reached its maximum age or final use.
For example, a production machine that has been used for years and it's time to replace it with a new one. Because it can no longer function optimally and affect the company's production results.
Or production machines that are still good and functioning, but are no longer needed for their use. Because companies need other types of production machines to maximize their production results.
Some experts also argue that residual value is the residual value of an asset or item that has reached the end of its economic life. However, in accounting, value is often calculated by subtracting overhead.
From the two definitions of salvage value above, it can be concluded that salvage value is the resale value of an item or asset that is no longer useful or useless for business.
The Important Role of Residual Value in Company Finances
Depreciation value or depreciation expense is one of the calculations that affects the condition of the company, especially in the company's financial statements. Therefore, this value is sufficient to affect the company's financial condition in terms of its residual value.
According to Statement of Financial Accounting Standards (PSAK) No. 16, the depreciable amount or depreciation expense is the amount of a systematic allocation of an asset that can be reduced over its useful life.
However, the depreciation value in the accounting period above is charged directly or indirectly to the company's revenue.
Therefore, this value is very important for the financial position of a company, because it affects the amount of depreciation expense. In addition, it will also affect the presentation of the Company's financial statements.
Therefore, the employee who is responsible for this must be analyzed. All evidence of transactions that occurred during the purchase of each asset or item to find out when the asset was purchased and what is its depreciation value and economic life.
Residual Value Important Role Is
One of the depreciation that may impact the status of a business is depreciation expense, especially when included in a company's financial statements.
Consequently, this value has a significant impact on how the company fares in terms of its residual value.
Depreciation expenditure or often known as depreciation is a systematic distribution of the value of an asset that can be deducted over its useful life according to Statement of Financial Accounting Standards (PSAK) No.16.
Depreciation, however, will be directly or indirectly applied to income throughout the accounting period.
Because of its impact on the amount of depreciation expense, this value is very important for the financial health of the company. In addition, this will have an impact on how the company's financial statements are presented.
Therefore, it is very important for the personnel responsible for this matter to examine each transaction record made during the acquisition of an asset to determine when the purchase was made and what is the depreciation value of the asset or its economic life.
Residual Value Benefits
Understanding how to calculate residual value to estimate depreciation expense or depreciation expense is essential when presenting a company's financial statements. This is because the possibility of calculating the residual value can have an impact on the state of the company.
The Statement of Financial Accounting Standards (PSAK) defines depreciation or depreciation expense as the systematic distribution of the deductible amount of an asset over its useful life.
Depreciation can directly or indirectly affect the revenue share of an accounting period, which will impact net income. Therefore, because it affects the amount of depreciation, residual value is an indicator that really helps a company's financial health.
This residual value will impact how the financial statements are presented as well. Therefore, it is the responsibility of the accountant who is responsible in this area to examine the documentation of transactions that occur during the acquisition of assets.
How to Calculate Residual Value
The depreciation charge can be calculated to calculate the residual value. There are 4 different ways to calculate residual values, including:
Number of Years Depreciation Method
The number of years depreciation method is the first method that can be used to calculate residual values. The depreciation value will continue to decrease each year according to this method.
residual value will be one component of calculations done in this way. The formula for the depreciation method for the digits of the years is:
Depreciation = Remaining Lifespan: Number of Years x (Acquisition Price – Residual Value)
residual value can also be determined using the formula above. The formula becomes:
Residual Value = Acquisition Price – Depreciation x Number of Years: Remaining Lifespan
Straight Line Depreciation Method
The most popular method to find out how to calculate the residual value and depreciation expense is the straight-line method of depreciation. This is due to the direct calculations shown by this method.
This method focuses calculations on depreciation as a function of time rather than usage. Therefore, in using this method, a salvage value is required.
this residual value and the depreciation cost of fixed assets are closely related.
The formula for the straight-line depreciation method for calculating depreciation expense is as follows:
Depreciation = (Acquisition Price – Residual Value) : Economic Age
Working Hours Depreciation Method
The depreciation of hours worked can also be used to calculate residual values. The acquisition price, or initial cost of purchasing the asset, is related to the calculated residual value.
The hours worked depreciation method has the following formula for calculating depreciation expense:
Hourly Depreciation Cost = Acquisition Price – Residual Value + Total Number of Hours Worked
From the above formula, the following is the residual value formula:
Residual Value = Acquisition Price + Total Number of Hours Worked – Hourly Depreciation Cost
The residual value is not directly connected to the depreciation method, as the formula above shows, but may still have a value in depreciation expense. This is because the variables can be affected by residual values.
Method of Production Results
The production method is the fourth method for calculating residual values. The number of product units produced during a certain period of time will be used to determine the amount of depreciation expense.
From this it is clear that the depreciation value for each period, which is determined by calculating the depreciation expense, varies according to changes in production output.
Using the production method, the following formula can be used to calculate the depreciation expense while knowing the residual value:
Depreciation Cost Per Unit Product = (Acquisition Price – Residual Value) : Total Number of Products Produced
The following formula can be used to calculate the residual value from the formula above:
Residual Value = Acquisition Price – Depreciation Cost Per Unit Product x Total Number of Products Produced
As can be seen from the formula above, the residual value is closely related to the cost at which the asset was first acquired or the cost at which it was acquired.
Differences in Residual Value, Scrap Value, and Salvage Value
The words residual value, scrap value, and salvage value sometimes cause misunderstandings. Technically, every word used in accounting is the same.
What Is the Impact of Residual Value on Accounting?
The value of the cash flows that the company generates beyond the predicted period is used to determine the residual value. The company must value cash flows over these 15 years in projections of, say, its operations for the next 15 years.
Therefore, the company will discount the cash flows in this case to determine its net worth. The market value of the company is then increased by the net present value.
Residual values thus provide a better picture of when accounting is done or even when a company wants to sell an asset beyond its useful life.
Below are questions and answers about what residual value is, as follows:
Is Residual Value the Same as Book Value?
The residual value of an asset, often known as salvage value, is the estimated or calculated value of an asset after depreciation. Businesses may benefit from knowing the residual value of their assets so they can recover some of their value if and when the assets no longer perform the value they were intended for.
What is the Purpose of Applying Residual Value of Fixed Assets?
Depreciation objective is calculated using the projected value of fixed assets and their economic life to calculate the residual value. Depreciation of fixed assets can be assisted by calculating the residual value after the fixed assets no longer generate value for investment.
The residual value is sale value return an asset at the end of its useful life. The determination of residual value also assists in the depreciation of fixed assets, especially when the values are completely ineffective.
Residual value is an indicator that really helps a company's financial health because it affects the amount of depreciation and its economic life.
That's the conclusion about what residual value is, I hope the information above can be useful and useful for all of you!