The residual value of an asset is determined by considering the estimated amount that an asset's owner would earn by disposing of the asset, less any disposal cost. With residual value, it is assumed that the asset has reached the end of its useful life and is in the condition the asset was expected to be in at the end of its life.

When it comes to the residual value of a leased car, for example, it equals the estimated value of the car at the end of the lease. It is the price at which the car's lessee can purchase the car from the leasing company if the lessee decides to keep the car at the end of the lease.

If a person owns a car instead of leasing it, the residual value would equal the salvage value of the car minus any costs to dispose of the car. Imagine, for example, that a person has a 10-year-old car that is considered to be a clunker. While this person can't sell the car to a buyer, he can sell it back to the cash-for-clunkers government program, where he receives $500 to dispose of the car. It costs him $100 to transport the car to the junkyard, meaning that the residual value of the car is $400.

The residual value of an asset should be checked at least once a year, at the end of each year. If the residual value estimate changes when checking its value, the change should be accounted for as a change in the accounting estimate.