When you are dealing with the accounting tasks that are related to assets, you will often come across the phrase “useful life”. It refers to the amount of time the assets are expected to be functional and are suitable for its functions. Some people would call it as economic life, effective life or service life. Typically, people will measure the useful life of assets in years. The useful life ends when an asset is no longer able to operate as needed or the company (Also see Prohibitions on the Use of Company Names under the Minister’s Direction) no longer uses it to generate income.

In accounting, the concept of useful life is crucial as the accountants will use it to calculate depreciation. Depreciation refers to the process of charging the costs of a fixed asset to the expense account over the years the company uses it to earn revenues. Thus, depreciation helps to make sure that the company has expensed an asset by using the matching principle. This is because depreciation enables the company to recognise the expenses and their related revenues (Also see Journal Entries for Deferred Revenue) in the same accounting period.

With the help of the useful life, business owners get to know how they should allocate the cost of an asset. This allows them to spread the cost incurred on the procurement of that asset across the accounting periods that the company is using that asset to generate revenue. This is a better way to deal with the asset cost compared to including the full amount in the period the company bought the asset.

There is no exact answer for the calculation of an asset’s useful life. However, one should make the estimate as accurate as possible as the useful life will bring an impact on the amount charged to the expense (Also see What is Interest Expense?) account in each period. Business owners who are not familiar with accounting treatments may find this task challenging. Thus, a better way to solve this issue rather than guessing the possible useful life for the assets owned by themselves is to hire an accounting firm in Johor Bahru. The professionals will be able to make reasonable estimates so that the business owners do not need to worry about the accuracy of the calculations related to the asset’s useful life anymore.

Factors that would influence the useful life of an asset include the frequency of use, the “age” of the asset at the time the company purchases it, as well as technological advances. If the company uses certain assets very frequently, then the asset is more likely to deteriorate at a faster rate. Typically, cars and vehicles can last for three to six years, and the same goes for some of the automotive equipment. Most furniture will last for about five to ten years, while the range the useful life of machines and equipment will be larger than this.

One more thing the business owners should note is that the amount of time the asset is useful for their company and the entire lifespan of that asset may not be the same. Thus, if they want to calculate the useful life of the assets that they expect to replace with a new one once those assets (Also see Procedures of Asset Impairment) become outdated, instead of recording their physical life, they should record the amount of time their company would be using that asset.