how do we end up with salvage value if the item is depreciated the cost of the item either over a period of years or all in one year? How does salvage value work?

Salvage value is the estimated residual value or the worth of an asset at the end of its useful life. It is commonly used in accounting and financial calculations to determine depreciation expenses. To better understand how salvage value works, let's break it down into a few steps:

1. Depreciation: Depreciation is the process of allocating the cost of an asset over its expected useful life. It is done to match the expense with the revenue generated by using the asset. There are various depreciation methods, such as straight-line, declining balance, or units of production.

2. Useful Life: The useful life represents the estimated timeframe during which the asset will be used and generate revenue. It is a subjective figure based on factors like wear and tear, technological advancements, and industry standards.

3. Book Value: Over the years of depreciation, the asset's book value decreases. The book value is the cost of the asset minus accumulated depreciation. As depreciation expenses are recognized, the book value reduces gradually.

4. Salvage Value: At the end of the asset's useful life, the company may decide to sell or dispose of it. The salvage value is the expected amount the company will receive from selling the asset. It is an estimate and can vary based on market conditions, the condition of the asset, and other relevant factors.

Now, how do we calculate the salvage value? There are various approaches:

a. Management's Estimation: The company's management will often estimate the salvage value based on their experience, market research, or expert opinions.

b. Similar Asset Prices: If similar assets are being sold in the market, their prices can be used to estimate the salvage value.

c. Historical Data: If the company has previously sold similar assets and has data on the actual amount received, it can be used as a reference.

d. Appraisals: Sometimes, professional appraisers are hired to determine the salvage value by assessing the asset's condition, market demand, and other relevant factors.

It's important to note that salvage value influences the depreciation calculation. Depending on the method used, the salvage value is either subtracted from the asset's cost directly or considered at the end to determine if any depreciation needs to be adjusted. The principle is to allocate the total cost of the asset over its useful life, and salvage value helps capture the expected residual value at the end.