When calculating depreciation on a non-current asset, what is the purpose of the residual value?

The purpose of the residual value when calculating depreciation on a non-current asset is to estimate the asset's selling price at the end of its useful life. Residual value, also known as salvage value, is essential because it represents the amount that the entity expects to receive when the asset is disposed of after its useful life has expired. This estimate helps in determining how much of the asset's cost will be allocated as an expense through depreciation over its useful life.

When calculating depreciation, the total cost of the asset is reduced by its residual value, which results in the depreciable amount. This amount then gets divided by the useful life of the asset to compute the annual depreciation expense. By considering the residual value, businesses ensure a more accurate reflection of the asset's wear and tear while also considering its expected recovery value at the end of its operational period.