Definition of Asset’s Useful Life
An asset’s useful life is the estimated period of time (or total amount of activity) that a long-lived asset will be economically feasible for use in a business. In other words, it is the expected number of years that the business asset will be in service for earning revenues.
With technological advances, an asset’s useful life will likely be shorter than its physical life.
Example of an Asset’s Useful Life
Assume that a high tech company’s cell phones are expected to have a useful life of three years (even though the physical life of the cell phones could be 10 years). Also assume that the company has purchased 100 smart phones at a total cost of $120,000. The company also estimates that the phones will have no salvage value at the end of the useful life.
The company’s straight-line depreciation will be $40,000 ($120,000 / 3 years). This allocation of the phones’ cost to the accounting periods that benefit from the asset’s use follows the accountant’s matching principle. This makes the company’s financial statements more realistic and in compliance with the accrual basis of accounting.
Note: In the U.S., income tax regulations specify the useful life that must be used for income tax reporting. This is one reason that in a given year the depreciation on a company’s income tax return will not agree with the depreciation reported on its financial statements.
