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.