Scrap value is the estimated value of an asset’s components or materials when the asset is no longer in use or at the end of its useful life.
What is scrap value?
Scrap value is a key consideration in asset depreciation, accounting, and financial decision-making. It represents the amount that can be obtained from selling the parts or materials of an asset after it has been fully depreciated or is no longer useful for its intended purpose.
In the context of depreciation, scrap value is an essential component in calculating the depreciation expense of an asset. The formula for straight-line depreciation is:
Depreciation expense = (Cost of asset − Scrap value) / Useful life
Some assets may have a scrap value of zero, indicating that they are expected to have no residual worth after being fully depreciated.
Scrap value affects the tax implications of an asset. If the scrap value is substantial, it can impact the total depreciation claimed over an asset’s life.
Residual value vs. scrap value: While the terms are often used similarly, there can be nuances. Residual value may imply some remaining usefulness, while scrap value specifically refers to the value obtained by selling the materials as scrap.
Example of scrap value
ABC Manufacturing Company purchases a machine for £30,000, which it anticipates using for production over the next 10 years. The machine is estimated to have a scrap value of £2,000 at the end of its useful life.
Using straight-line depreciation, the annual depreciation expense is calculated as follows:
Depreciation expense = £30,000 − £2,000 / 10 years = £2,800 per year
The book value of the machine is reduced by £2,800 each year. After 10 years, the book value will be £30,000 – (10 years x £2,800) = £2,000, matching the estimated scrap value.
In this example, the scrap value of £2,000 represents the estimated worth of the machine’s components or materials at the end of its useful life.