Useful life

Written by Fmi.Online Thursday November 10, 2022
The useful life of an asset, often called the service life, is the length of time an asset can be productively used in operations. In other words, this is the amount of time an asset is able to be used productively. Keep in mind that this isn’t the amount of time an asset continues to run or remain usable. This is the amount of time a business can productively use the asset.

Explanation :

When determining the useful life of an asset, accountants generally look at two things: inadequacy and obsolescence. Inadequacy refers to the ability of the asset to perform its duties productively. In our computer example, the older machines would be inadequate because they can’t run updated software efficiently. Obsolescence  deals with the fact that older computers are not up to date with current standards. For instance, a computer with a 5 GB hard drive was unfathomable in 1991. Today this computer would be completely worthless. The operating system wouldn't even be able to fit on this machine.

In a nutshell :

  • The useful life of an asset is an accounting estimate of the number of years it is likely to remain in service for the purpose of cost-effective revenue generation. 
  • The Internal Revenue Service employs useful life estimates to determine the amount of time during which an asset can be depreciated. 
  • There are a variety of factors that can affect useful life estimates, including usage patterns, the age of the asset at the time of purchase and technological advances.
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