Useful life

Definition

Useful life is the estimated period over which a long-term asset is expected to be used before it is fully depreciated. It impacts financial statements through depreciation and asset valuation.

5 Must Know Facts For Your Next Test

1. Useful life is an estimate and may be revised if circumstances change.
2. It affects the calculation of depreciation expense on financial statements.
3. Useful life can differ for tangible and intangible assets.
4. Assets with a longer useful life will have lower annual depreciation expenses.
5. Depreciation methods (such as straight-line or declining balance) rely on the useful life of an asset.

Review Questions

• What is the impact of useful life on depreciation expense?
• How can changes in useful life affect financial statements?
• What factors might lead to a revision of an asset's useful life?

Related terms

Depreciation:

The systematic allocation of the cost of a tangible asset over its useful life.

Amortization:

The process of spreading the cost of an intangible asset over its useful life.

Residual Value:

The estimated amount that will be received at the end of an asset’s useful life after all depreciation has been accounted for.