Residual value has two potential meanings, depending on the situation. In a leasing situation, such as a car lease or the rental of office equipment, the residual value is the expected remaining value the leased item will have upon its return. For accounting and tax purposes, however, residual value refers to the depreciated value of an item.
When an individual leases an item such as a vehicle, he pays a fee for the temporary use of the item being leased. That fee is based on the worth of the item. It is also based on the expected worth of the item upon its return.
Assume for example that a person is leasing a $50,000 US Dollars (USD) vehicle. He will be using the car for a period of two years, at which time he must return the car. Therefore, the amount he is going to pay should equate to the amount of worth he receives from the vehicle.
Since the car will still have value when it is returned, the person leasing the car shouldn't have to pay as if he was using $50,000 (USD) worth of value. Instead, the residual value is determined. For example, the car may have $30,000 (USD) of value upon its return. The amount of interest the leasee is charged and the amount of monthly payments he will incur for the use of the vehicle is thus based on calculating $50,000 USD minus $30,000 USD to determine that he is receiving $20,000 USD of value from the use of the vehicle over the two-year period.
In the accounting context, residual value has a different meaning. When used on a balance sheet listing assets and expenses, the depreciated value of the item is referred to as its residual value. In other words, the term refers to the value that is left in a given item.
Assume for example that a company purchases a computer. That computer will be used and will get older. As it does, its value will be reduced or depreciated.
When the company lists its assets, the computer should still be listed as an asset since the company still owns it. The value, however, is not the full value that the company paid for the computer. Instead, the appropriate value is the residual value or the current amount that he computer is worth in the condition it is in.
