Month End Glossary

Useful Life

Useful life refers to the expected duration an asset is used effectively in a company's operations to produce goods or services.

Useful life is an estimation of the period during which an asset will be productive and contribute its intended function to a business or organization. This duration helps in determining how long the asset will provide value before it becomes inefficient, outdated, or uneconomical to continue using. For example, a company's machinery with a designated useful life of 10 years implies the machinery is expected to operate efficiently for that duration. The concept of useful life is integral when deciding the depreciation schedule of a tangible asset or the amortization period of certain intangible assets. Factors affecting the useful life include wear and tear, technological advancements, and regulatory changes. For instance, a desktop computer might have a useful life of 5 years due to rapid technological advancements, while a building's useful life could span multiple decades. Businesses use the estimation of useful life to plan for replacements, upgrades, or write-offs. This estimation plays a fundamental role in the accounting and financial management of business assets, assisting in reflecting an asset’s value accurately in financial statements.

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