Residual value
Residual value is the estimated amount an asset will be worth at the end of its useful life. Small businesses use it to work out depreciation and, in leasing or contract hire, to set any final (balloon) payment or expected resale value.
Where you will meet it:
- Fixed assets: residual value reduces the amount you depreciate. The depreciable amount is the purchase cost minus the residual value.
- Leases and contract hire: it’s the expected value of the asset at the end of the term. It may be guaranteed by you or set by the finance company, and it affects monthly payments.
Simple depreciation example
If an asset costs 10,000 and the residual value is 1,000, you depreciate 9,000 over its useful life. This is only an illustration.
Residual value is an estimate, not a promise. Base it on realistic market data and review it if your plans or the asset’s condition change. In leases, check whether you carry a guaranteed residual or only return conditions (such as mileage and wear), because that changes your risk and possible charges.
Practical tip
Document how you arrived at the residual value (e.g. price lists or quotes). It helps explain your depreciation and any difference when the asset is sold or returned.
