Useful life – What is the useful life of an asset?
Useful life refers to the amount of time an asset is expected to be functional and fit-for-purpose.
Understanding assets, depreciation and amortisation is an important part of small business accounting. Find out more with Debitoor’s small business guide.
Also known as economic life or service life, useful life is usually measured in years, ending when the asset is unable to operate as required or can no longer be used to generate revenues.
Useful life and depreciation of fixed assets
Useful life is an important concept in accounting because it is used to work out depreciation. Depreciation is the process of expensing a fixed asset across the number of years it helps generate revenues.
Depreciation therefore ensures that an asset is expensed in accordance with the matching principle, whereby expenses are recognised in the same accounting period as related revenues.
By knowing the useful life of an asset, a business can work out how to allot the initial cost of the asset, ensuring the initial cost is spread across all relevant accounting periods rather than unfairly weighted in the period the asset was purchased.
Depreciation is only applied to fixed, tangible assets. For intangible assets, the corresponding concept is amortisation.
How do I calculate an asset’s useful life?
Calculating the useful life of an asset is not an exact science. However, it is important to make as accurate an estimate as possible because useful life has a direct impact on how much an asset is expensed in each accounting period.
For example, if you change an asset’s useful life from three to six years, depreciation is carried out for twice as long but the amount expensed each period is halved.
Several factors can affect how long an asset is expected to be useful, including:
- Usage – the more an asset is used, the quicker it will deteriorate
- Whether the asset is new at the time of purchase
- Technological advances.
Typically, the useful life of an asset fits somewhere within the follow ranges:
- Cars and automotive equipment: 3-6 years
- Furniture: 5-12 years
- Machinery and equipment: 3-20 years
- Property, buildings and renovations: 10-50 years.
Useful life vs. physical life
When calculating an asset’s useful life, it’s important to remember that amount of time an asset is useful to a business may not always be the same as the asset’s entire lifespan. For example, due to technological advances, an asset is usually considered to be useful for less time that it could actually be operated.
When calculating the useful life of assets that you expect to replace once it becomes outdated, you should record the number of years that the asset will be used by your business before it is replaced, rather than recording the asset's entire physical life.
Useful life of an asset in Debitoor
Process your expenses as assets and automatically track their value with Debitoor invoicing software.
Whenever you create a new expense, you’ll be given the option to mark the expense as an asset. All you need to is enter the asset’s useful life and expected residual value, then Debitoor will automatically calculate the depreciation cost per year.