Definition: The useful life of an asset, often called the service life, is the length of time an asset can be productively used in operations. In other words, this is the amount of time an asset if able to be used productively. Keep in mind that this isn’t the amount of time a asset continues to run or remain usable. This is the amount of time a business can productively use the asset.
For example, a computer might last for 8-10 years before the hard drive dies and it no longer works anymore. Businesses, however, rarely keep their office equipment this long. Toward the second to third year of the company’s life it becomes sluggish and can’t run programs as efficiently and as quickly as it could when it was new.
This is why many companies lease or buy new computers every two to three years. After the third year, the computers still operate, but they are too slow to productively use in the company’s operations. In this case, the computers’ useful life is only 2-3 years even though its productive life is closer to eight or ten years.
What Does Useful Life Mean?
When determining the useful life of an asset, accountants generally look at two things: inadequacy and obsolescence. Inadequacy refers the ability of the asset to perform its duties productively. In our computer example, the older machines would be inadequate because they can’t run updated software efficiently.
Obsolescence deals with the fact that older computers are not up to date with current standards. For instance, a computer with a 5 GB hard drive was unfathomable in 1991. Today this computer would be completely worthless. The operating system allow wouldn’t even be able to fit on this machine.