Economic Life

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DEFINITION

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.

INVESTOPEDIA EXPLAINS

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.


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