Useful Life

DEFINITION of 'Useful Life'

An estimate of how long one can expect to use an income-producing item in a trade or business setting. Useful life usually refers to the duration for which the item will be useful (to the business), and not how long the property will actually last. Many factors affect a property's useful life, including the frequency of use, the age when acquired and the repair policy and environmental conditions of the business. The useful life for identical types of property will differ from user to user depending on the above factors, as well as additional factors such as foreseeable technological improvements, economic changes and changes in laws.

BREAKING DOWN 'Useful Life'

The IRS employs useful life for estimating the amount of time over which an asset can be depreciated. The estimate is based on certain facts which may change over time. The useful life can be adjusted to reflect these changes; however, the changes must be substantial and there must be clear reason for making the change.

For example, a company purchases a machine Jan. 1, 2007 and estimates it will have a useful life of eight years. In 2011, however, the company realized that improvements in technology will render the machine obsolete by the end of 2012. Now, rather than having a useful life of eight years, the machine has a useful life of six years. The depreciation that has already been reported for years 2007, 2008, 2009 and 2010 cannot be changed, and any amount not yet depreciated as of Dec. 31, 2010 will have to be depreciated over the next two years until the machine is no longer in use.

RELATED TERMS
  1. Amortization

    1. The paying off of debt in regular installments over a period ...
  2. Economic Life

    The expected period of time during which an asset is useful to ...
  3. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  4. Salvage Value

    The estimated value that an asset will realize upon its sale ...
  5. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  6. Absolute Physical Life

    The length of time that it takes for an asset takes to become ...
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. Forex Education

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  3. Term

    The History and Purpose of TQM

    Total quality management explores processes to enhance quality and productivity.
  4. Economics

    Understanding Cost-Volume Profit Analysis

    Business managers use cost-volume profit analysis to gauge the profitability of their company’s products or services.
  5. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  6. Investing Basics

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  7. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  8. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  9. Investing Basics

    Analyze Cash Flow The Easy Way

    Cash flow statements reveal how a company spends its money and where that money comes from.
  10. Economics

    What is a Trade Credit?

    Trade credit means that a customer purchases goods from a seller who allows the purchaser to pay for those goods at a later time.
RELATED FAQS
  1. What is the difference between terminal value and residual value?

    For the purposes of business accounting or financial management, the terms residual value and terminal value refer to the ... Read Full Answer >>
  2. Why do companies often treat events such as the purchase of an asset or construction ...

    Companies treat events such as purchasing building facilities or other fixed assets as a capitalized cost because they are ... Read Full Answer >>
  3. How does proration affect asset depreciation?

    Accountants calculate an asset's pro-rata depreciation during the first and final year of its service. The IRS established ... Read Full Answer >>
  4. What are the disadvantages of using the sinking fund method to depreciate an asset?

    Using the sinking fund depreciation definitely impinges on a company's cash flow and profitability during the depreciation ... Read Full Answer >>
  5. How are impaired assets treated under U.S. accounting rules?

    Under the generally accepted accounting principles (GAAP), impaired assets are addressed in Statement 144 and the Impairment ... Read Full Answer >>
  6. What are some ways a business owner can reduce unlimited liability?

    Fixed assets become impaired when there is a quick decrease in the value of a fixed asset below its original cost due to ... Read Full Answer >>
  7. Which consumer goods do Americans buy the most of?

    A tangible asset is any asset with a physical form, and includes fixed assets such as machinery, land and buildings. Tangible ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center