Useful Life
IntermediateUseful life is the period over which an asset is expected to be used by a business, or the number of units it is expected to produce. It determines how its cost is spread through depreciation or amortization.
When a company buys a long-term asset, it must estimate how long the asset will be useful. That estimate decides how quickly the asset's cost is charged to the income statement.
For example, a company might estimate that a delivery van has a useful life of five years, office furniture ten years and a building forty years. A van costing 40,000 with no expected resale value and a five-year useful life would be depreciated at 8,000 a year under the straight-line method.
Useful life is not the same as physical life. A computer may still work after eight years, but if the business expects to replace it after four because of technology changes, its useful life is four years.
Estimating useful life involves judgment. Factors include expected wear and tear, technological change, legal limits such as the length of a patent or lease, and the company's replacement policy. Companies review these estimates regularly. If a useful life changes, the remaining depreciation is adjusted from that point onwards, which can noticeably affect reported profits.
For worked examples and full lessons, visit notesbysara.org.