Economic Life

AAA

DEFINITION of 'Economic Life'

The expected period of time during which an asset is useful to the average owner. The economic life of an asset could be different than the actual physical life of the asset. Estimating the economic life of an asset is important for businesses so that they can determine when it is worthwhile to invest in new equipment. In addition, businesses must plan so that they have sufficient funds to purchase replacements for expensive equipment once it has exceeded its useful life.

BREAKING DOWN 'Economic Life'

The concept of economic life is also connected to depreciation schedules. Accounting standards bodies usually set generally accepted guidelines for estimating and adjusting this time period. In theory, businesses recognize depreciation expenses on a schedule that approximates the rate at which economic life is used up.

This is not always true for tax purposes, however. Because owners may have superior information about specific assets, the economic life used in internal calculations may differ significantly from the depreciable life required for tax purposes. In addition, many businesses recognize depreciation expense differently based on management's goals. For example, a business might want to recognize costs as quickly as possible in order to minimize current tax liabilities and may do this by choosing accelerated depreciation schedules.

RELATED TERMS
  1. Amortization

    1. The paying off of debt in regular installments over a period ...
  2. Residual Value

    How much a fixed asset is worth at the end of its lease, or at ...
  3. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  4. Useful Life

    An estimate of how long one can expect to use an income-producing ...
  5. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  6. Profit Margin

    A category of ratios measuring profitability calculated as net ...
Related Articles
  1. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  2. Fundamental Analysis

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  3. Forex Education

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  4. Retirement

    Life-Cycle Funds: Can It Get Any Simpler?

    Discover a security that offers a way for you to put your retirement portfolio on autopilot.
  5. Options & Futures

    Find Investment Quality In The Income Statement

    Use these key attributes to uncover top-level investments.
  6. Options & Futures

    EBITDA: Challenging The Calculation

    This measure has a bad rap, but it's still a valuable tool when used appropriately.
  7. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  8. Economics

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  10. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  3. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  4. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  2. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  3. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  4. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  5. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  6. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!