Salvage value and book value are two important components of depreciation calculation which account for the reduction in value over time for tangible capital assets. The key difference between salvage value and book value is that salvage value is the estimated resale value of an asset at the end of the economic useful life whereas book value is the value at which the asset is carried on the balance sheet or value of total assets net total liabilities.
CONTENTS
1. Overview and Key Difference
2. What is Salvage Value
3. What is Book Value
4. Side by Side Comparison – Salvage Value vs Book Value
5. Summary
What is Salvage Value?
Salvage value is the estimated resale value of an asset at the end of its economic useful life. Salvage value is deducted from the purchase price (cost) of a fixed asset to arrive at the amount of the asset cost that should be depreciated. Thus, salvage value becomes useful in the depreciation calculation. Salvage value is also referred to as ‘residual value’ and ‘resale value’.
E.g. ABC Company purchases an asset for $ 100,000 with an estimated salvage value of $ 20,000. The economic useful life of the asset is 10 years. Depreciation will be calculated after deducting the salvage value which means that $80,000 will be divided by 10 years resulting in an annual depreciation charge of $ 8,000.
Salvage value will not be included when calculating depreciation if,
- It is too difficult to determine a salvage value
- If the salvage value is expected to be insignificant
What is Book Value?
Book value of an asset is the value at which the asset is carried on the balance sheet. Also referred to as the ‘net book value’, this is calculated by subtracting the accumulated depreciation (collective depreciation amounts incurred up to the point of calculating the book value) from the cost of an asset. Each year the depreciation will be charged on the book value, which reduces with each passing year. Continuing from the above example,
E.g. Purchase cost = $ 100,000 Salvage value = $ 20,000 Economic useful life = 10 years
Book value is also a term used for the ‘net asset value’ of the company. This is the difference between total assets and total liabilities. In this case, book value is the value that will be received by shareholders, in case that the company is liquidated.
Figure 1: Book value of a company
What is the difference between Salvage Value and Book Value?
Salvage Value vs Book Value |
|
| Salvage value is the estimated resale value of an asset at the end of the economic useful life. | Book value is the value at which the asset is carried on the balance sheet or value of total assets net total liabilities. |
| Cash Flow | |
| Cash will be received at the end of the useful life of the asset to be equal to the amount of the salvage value. | A cash amount that is equal to the book value of the asset will be received if the asset is sold. |
| Depreciation | |
| Depreciation is calculated after deducting the salvage value. | Book value is the resulting value after accounting for depreciation. |
Summary – Salvage Value vs Book Value
The difference between salvage value and book value is a distinct one where salvage value is the estimated amount of cash receivable for the asset at the end of its economic useful life while book value is the cost less accumulated depreciation. Salvage value is an estimation value and this may or may not be the actual amount received at the point of reselling the asset. In a situation of liquidation, the funds received will usually exceed the book value due to the value of goodwill of the company.
References
1. “What is salvage value? – Questions & Answers.” AccountingTools. N.p., n.d. Web. 06 Apr. 2017.
2. “Book Value.” Investopedia. N.p., 31 July 2013. Web. 06 Apr. 2017.
3. “Nominal vs Book vs Market Value.” Softminer.Net: Nominal vs Book vs Market Value. N.p., n.d. Web. 06 Apr. 2017.
4. “Reducing Balance Depreciation Method.” Declining Balance Depreciation Method – Explanation and Example. N.p., n.d. Web. 06 Apr. 2017.