Useful life is expressed in terms of use expected from the asset under the
Useful life is the estimated period for which the asset is expected to be functional and can be used for the company’s core operations and serves as an important input for calculating depreciation for assets which affects the profitability and carrying value of the assets. Show
Table of contentsHow to Determine?It estimates a period until which the asset can be put to use, and it contributes to generating revenue. The following are the factors considered in determining it –
You are free to use this image on your website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked Useful Life of EquipmentEvery asset has its period of usability, after which it cannot be put to use, or it will be obsolete. The useful life of assets will vary according to their nature, usage of the asset, company’s replacement policy, etc. There are estimations available based on the nature of the asset provided by the accounting body. Therefore, the company can adopt the same for their assets or make their assessment based on the proper asset valuation. Impact on Depreciation
Examples of Useful LifeBelow are the examples to understand the concept in a better manner – E.g., .#1X Corp purchased a vehicle to transport its goods from its factory to the warehouse. The cost of the vehicle is $55,000, its expected useful life is ten years, and the salvage value is $5,000. Solution Calculation of depreciation will be as follows, Depreciation under straight-line methodDepreciation Under Straight-line MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. read more = (Cost of the asset – salvage value)/ Useful life
So the impact of profitability on account of depreciation is $5,000 Per annum. E.g., .#2In case the company estimates the vehicle’s useful life as 12 years with the same salvage value. So the revised depreciation calculation will be as follows: Solution Calculation of depreciation will be as follows, Depreciation under straight-line method = ($55,000 – $5,000)/ 12
So the impact on profitability will be $4,167 Per annum. So there is an improvement in profitability to $833 per annum. Change in an asset’s life or any revision is done prospectively and reported no of earlier years need not be changed. The prior period reported values need not be changed as it is not an accounting errorAccounting ErrorAccounting errors refer to the typical mistakes made unintentionally while recording and posting accounting entries. These mistakes should not be considered fraudulent behaviour first-hand as this can happen with anyone and by anyone.read more, and it is an estimation; change in it is an inherent element. E.g., #3Suppose the revision of its useful life is done at the end of the 5th year, in the above case. The depreciation is already provided for five years as per 10 yrs. The depreciation provided is $25,000 ($5,000 Per Annum* 5 yrs). The book value of a vehicle will be $30,000 since life is revised as 12 years (i.e.) another 7 yrs instead of 5 yrs. Solution Calculation of depreciation will be as follows – Depreciation = (Historical cost of the asset – Accumulated depreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet.read more – Salvage value)/ Remaining useful life
The above depreciation is a non-cash expenditure, the cash outflow happens at the time of purchase of a vehicle, and there won’t be any yearly impact. It is an allowable expense for tax depreciation, but the method of computation of depreciation is an accelerated methodDepreciation Is An Accelerated MethodAccelerated depreciation is a way of depreciating assets at a faster rate than the straight-line method, resulting in higher depreciation expenses in the early years of the asset's useful life than in the later years. The assumption that assets are more productive in the early years than in later years is the main motivation for using this method. read more. Difference Between Useful and Physical Life
ConclusionUseful life is an estimation and the actual life of the asset, maybe even more, or it can be less. It has to be considered after proper evaluation and considering all the factors. It is regarded as a critical element in asset recording and valuation as the depreciation and carrying value of the assetCarrying Value Of The AssetCarrying value is the book value of assets in a company's balance sheet, computed as the original cost less accumulated depreciation/impairments. It is calculated for intangible assets as the actual cost less amortization expense/impairments.read more depends on it, and it has a direct impact on profitability. It can always be revised considering the present technology, obsolete assets, higher usage, etc. Recommended ArticlesThis article has guided the Useful Life of an Asset and its definition. Here we discuss the useful life of the equipment, its impact on depreciation along with examples, and its differences from physical life. You may learn more about financing from the following articles – What is a useful life of an asset?Useful life is “an estimate of the average number of years an asset is considered useable before its value is fully depreciated.” 1.
How is useful life measured?How to determine the useful life of an asset. Most commonly, the depreciation of assets is calculated by dividing the cost of the asset by the estimated number of years in its life.
What is the expected value of an asset at the end of its useful life?The estimated value of an asset at the end of its useful life is called the salvage value. The book value is the amount of assets standing the account books, i.e., cost less accumulated depreciation.
How is useful life calculated for depreciation?Straight-Line Method. Subtract the asset's salvage value from its cost to determine the amount that can be depreciated.. Divide this amount by the number of years in the asset's useful lifespan.. Divide by 12 to tell you the monthly depreciation for the asset.. |