Useful Life
Candlefocus EditorThe purpose of determining a useful life is to accurately estimate the amount of depreciation each asset will receive during its useful life. Depreciation is an accounting tool that companies use to spread the cost of an asset over several years, instead of charging the full cost to the income statement on the year that the asset was acquired. This helps organizations plan for expenses, manage cash flow, and reduce the tax burden from large initial expenses.
When determining useful life, it’s important to consider how much use the asset will get. The more wear and tear the asset can take, the longer it’s useful life may be. Factors that can impact an asset's useful life include: the frequency of use, the quality of maintenance, and the environment in which the asset is used.
For example, a laptop computer may have a useful life of three to five years if it’s used regularly, but if the laptop is rarely used and properly maintained, the useful life could extend to eight years. On the other hand, if a car is used daily and not properly maintained, its useful life may be just five years.
When evaluating the useful life of an asset, it’s important to consider not only the current state of the asset but also its potential to remain productive in the future. If an asset requires frequent replacements or significant maintenance, its useful life could be shorter than expected. Accounting standards provide detailed guidance on the determination of useful life for physical and intangible assets.
In sum, useful life is a critical component of a company's asset management system that helps reduce expenses, manage cash flow, and plan for large capital expenditures. Ultimately, useful life helps organizations maximize the value of their assets over the long-term.