Book Value vs Salvage Value: Definition, Formula & Comparison Table
Understanding the difference between book value and salvage value is essential in accounting. This concept is crucial for Commerce students who want to excel in board exams or anyone involved in managing business assets. Knowing these values helps in solving practical problems on asset valuation, depreciation, and financial reporting.
| Parameter | Book Value | Salvage Value |
|---|---|---|
| Definition | Value of an asset after deducting accumulated depreciation from its original cost | Estimated market value of an asset at the end of its useful life |
| Calculated | Throughout the asset’s life, after annual depreciation | At the end of the asset’s useful life (estimate at acquisition) |
| Formula | Book Value = Original Cost – Accumulated Depreciation | Generally an estimate; no fixed formula, often based on policy or market trends |
| Use in Accounting | Shown in balance sheet, used for calculating profit/loss on asset disposal | Used for setting annual depreciation, estimating future cash inflow |
| Other Names | Net Book Value (NBV) | Residual Value, Scrap Value |
Book Value in Accounting
Book value refers to the current value of an asset according to financial records. It is calculated by subtracting accumulated depreciation from the original cost of the asset. Book value reflects how much an asset is worth in the company’s books at a certain date.
Book Value Formula
Book Value = Original Cost of Asset – Accumulated Depreciation
For example, if a machine costs ₹1,00,000 and ₹60,000 has been depreciated over four years, its book value is ₹40,000.
Role in Financial Reporting
Book value is reported on the balance sheet and used to compute profit or loss when an asset is sold. It is important for asset management, as well as for preparing final accounts and analyzing company solvency.
Salvage Value Explained
Salvage value estimates how much an asset can be sold for when it is no longer useful for business operations. It is a forecasted figure, decided before starting depreciation, and used to determine total depreciation to be charged.
Salvage Value Estimation
Salvage value is often guessed based on experience, market trends, or company policy. Sometimes, tax rules set a minimum salvage value for calculation purposes. For example, a vehicle’s salvage value after 10 years may be ₹5,000 as per company estimates.
Why Salvage Value Matters
Salvage value plays a key role in the calculation of depreciation. It impacts depreciation expense, profit calculation on disposal, and future financial planning. It is also called residual value or scrap value in some contexts. For more, visit accounting concept of depreciation.
Key Differences Between Book Value and Salvage Value
Although both represent asset values, book value and salvage value serve different purposes. Book value is the current worth of an asset on company books at any date, while salvage value is the expected amount receivable when the asset is disposed of at the end of its useful life. Book value changes every year with depreciation, but salvage value remains a fixed estimate.
Comparison Table: Book Value vs Salvage Value
| Aspect | Book Value | Salvage Value |
|---|---|---|
| When Calculated | At any given date of an asset's life | At the end of useful life (estimate) |
| Impact on Depreciation | Depreciation is deducted annually from book value | Sets the lowest value to which depreciation can be charged |
| Balance Sheet Appearance | Shown as asset value less accumulated depreciation | Not shown directly; used in depreciation calculation only |
Calculation Examples
Suppose a company buys equipment for ₹50,000. It estimates a salvage value of ₹5,000 after 5 years. Using the straight-line method:
- Annual Depreciation = (Cost – Salvage Value) / Useful Life = (₹50,000 – ₹5,000)/5 = ₹9,000 per year
- End of Year 1: Book Value = ₹50,000 – ₹9,000 = ₹41,000
- End of Year 5: Book Value = ₹50,000 – ₹45,000 = ₹5,000 (matches salvage value)
How Book Value and Salvage Value Help Students
These concepts commonly appear in CBSE and ICSE class 11–12 exams, competitive papers, and practical assignments. Proper understanding prevents calculation errors, ensures correct financial statement preparation, and helps solve problems related to profit or loss on disposal of asset or asset replacement decisions.
Related Concepts and Further Reading
- Methods of Depreciation
- Accounting Standards
- Ledger Accounts
- Non-Current Assets
- Cost of Assets for Calculating Depreciation
At Vedantu, we simplify complex Commerce topics like book value and salvage value for easy exam revision and real-world understanding. Mastering the difference between book value and salvage value helps you solve depreciation-based questions, analyze asset management, and boosts financial literacy for future use.
In summary, book value is the depreciated value of an asset at any point, while salvage value is the estimated residual amount at the end of its useful life. Knowing both helps in financial reporting, business decisions, and exam preparedness.
FAQs on Difference Between Book Value and Salvage Value in Accounting
1. What is the difference between salvage value and book value?
Book value reflects an asset's value after accounting for depreciation, while salvage value estimates its resale price at the end of its useful life. The book value decreases over time due to depreciation, whereas the salvage value is typically determined at the beginning of the asset's life and remains relatively constant.
2. Is salvage value the same as NBV?
No, Net Book Value (NBV) is the same as book value. NBV is the asset's carrying amount on the balance sheet after accumulated depreciation. Salvage value, on the other hand, represents the estimated market value at the end of the asset's useful life. They are distinct concepts used in asset accounting.
3. What is the difference between book value and depreciation?
Depreciation is the systematic allocation of an asset's cost over its useful life. Book value is the asset's cost less accumulated depreciation. Depreciation is a process, while book value is the resulting value after depreciation is applied. Different depreciation methods (e.g., straight-line, declining balance) will result in different book values at any given time.
4. What is the difference between cost and salvage value?
The cost of an asset is its original purchase price, including any related expenses. Salvage value is the estimated resale or disposal value of the asset at the end of its useful life. The cost is a historical figure, while salvage value is a future estimate. The difference between the cost and salvage value represents the depreciable amount.
5. What is the difference between book value and scrap value?
Book value represents the asset's carrying amount after accumulated depreciation. Scrap value (or residual value) is the asset's estimated value at the end of its useful life, often similar to salvage value. While both consider the asset's remaining value, book value is a dynamic figure changing with depreciation, whereas scrap value is a fixed estimate.
6. Difference between book value and salvage value with example
A machine purchased for $10,000 with an estimated salvage value of $1,000 and a useful life of 5 years. Using straight-line depreciation, annual depreciation is ($10,000 - $1,000)/5 = $1,800. After year 1, the book value is $10,000 - $1,800 = $8,200. The salvage value remains $1,000 throughout.
7. Salvage value and book value formula
Book Value = Original Cost - Accumulated Depreciation. Salvage Value is usually estimated; there isn't a single formula. It's often a percentage of the original cost or based on market research for similar used assets.
8. How is book value calculated?
Book value is calculated by subtracting the accumulated depreciation from the original cost of an asset. The formula is: Book Value = Original Cost - Accumulated Depreciation. The accumulated depreciation is determined by applying a chosen depreciation method (e.g., straight-line, declining balance).
9. What is salvage value?
Salvage value, also known as residual value or scrap value, is the estimated worth of an asset at the end of its useful life. It represents the amount the asset could be sold for after it is no longer used. It's crucial for calculating depreciation.
10. How is salvage value used in accounting?
Salvage value is essential in calculating depreciation expense. It determines the depreciable base (original cost less salvage value), influencing the amount of depreciation recognized each period. It also affects the book value of an asset. At the end of the asset's life, the salvage value is compared to the disposal proceeds to determine any gain or loss on disposal.
11. Does book value include salvage value?
No, book value does not include salvage value. Salvage value is deducted from the original cost to determine the depreciable amount, but it's not part of the book value calculation at any point during the asset's life. Book value only reflects the accumulated depreciation up to that point.
12. What is the difference between book value and residual value?
Book value is an asset's value on the balance sheet, after deducting accumulated depreciation. Residual value, also known as salvage value, is the estimated value of the asset at the end of its useful life. They are closely related because residual value is used to calculate depreciation, which directly affects the book value.
