Accounting - Life of the asset and the residual value
Life of the asset and the residual value
The life of an asset is usually an estimate. This is to be remembered when
discussing questions relating to asset valuation. Firstly, we are using the
historical cost of the asset; secondly, the life is only an estimate,
thirdly, estimates are made as to the residual, disposal or scrap value of
the asset; and, finally, assets differ in the nature of their use. At no
time during the life of the business is the balance sheet a valuation
When discussing the 'life' of an asset it is important that the life be
regarded as the 'economic life'. That is to say that the asset is only of
value to the business whilst generating revenue.
The residual value is what the business expects to get from the asset when
it is disposed of, for example, traded in.
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