Residual value refers to the expected remaining value of a leased item upon return, while salvage value refers to the depreciated value of an item for accounting and tax purposes. The fee for leasing an item is based on its value and expected value upon return.
Residual value has two potential meanings, depending on the situation. In a leasing situation, such as car rental or office equipment rental, residual value is the expected remaining value that the leased item will have upon return. For accounting and tax purposes, however, salvage value refers to the depreciated value of an item.
When an individual leases an item, such as a vehicle, he or she pays a fee for the temporary use of the item being leased. This fee is based on the value of the item. It is also based on the expected value of the item upon your return.
Suppose, for example, that a person is leasing a $50,000 US Dollar (USD) vehicle. He will be using the car for a period of two years, at which point he must return it. Therefore, the amount he will pay must be equal to the amount he receives from the vehicle.
Since the car will still have value when returned, the person renting it should not pay as if using a $50,000 (USD) value. Instead, residual value is determined. For example, the car may have $30,000 (USD) in value upon return. The amount of interest charged by the renter and the amount of monthly payments he will incur for the use of the vehicle are therefore based on calculating $50,000 minus $30,000 to determine that he is receiving $20,000 in value for the use of the vehicle. vehicle. the two-year period.
In the accounting context, residual value has a different meaning. When used on a balance sheet that lists assets and expenses, the item’s depreciated value is referred to as its salvage value. In other words, the term refers to the amount left in a given item.
Suppose, for example, that a company buys a computer. That computer will get used and get older. Thus, its value will be reduced or depreciated.
When the company lists its assets, the computer must still be listed as an asset, as the company still owns it. The value, however, is not the total amount that the company paid for the computer. Instead, the appropriate value is the salvage value, or the current amount the computer is worth in its as-is condition.
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