What is the useful life of an asset?

The concept of the useful life of an asset refers to the period of time during which a certain asset of a company is expected to contribute to the generation of income.

To determine the useful life of an asset, wear and tear, the participation of natural factors, changes in the demand for goods or services whose production or supply collaborates, as well as possible obsolescence as a result of technological advances.

Asset types

In a company you have to distinguish between fixed assets y current assets. The former are not subject to the short-term economic cycle and encompass the furniture, offices, vehicles and computer equipment among other things. Its function is to ensure the proper functioning of the business and not to obtain short-term liquidity, as is the case with current assets.

All assets have a fixed time in which they can be used by the company and it is generally specified in number of years. To calculate the useful life they are usually based on previous experiences, either their own or those of other companies.

Useful life in accounting

The definition of the useful life of an asset remains closely linked to the end of depreciación. And it is that to calculate the amortization or depreciation of a fixed asset it is necessary to know both the useful life and the residual value.

To know the annual degree of depreciation there are different methods and calculation. The most frequent is usually the linear method, which is based on subtracting the remaining value from the asset value (the amount paid at the time of purchase) and dividing it by the useful life.

It is necessary to clarify that the useful life of an asset can be extended in time if repairs or adequate maintenance are carried out regularly, as can be the case with machines.

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