Understand what the useful life of a fixed asset means, how to calculate it and what happens in accounting when useful life changes.
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Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. What is Useful Life?
The useful life of a fixed asset is the number of years it is used by a business to generate income. Useful life matters because it determines the length of time an asset is depreciated over and written off in accounting.
2. How to Determine the Useful Life of a Fixed Asset
To determine the useful life of an asset, a business needs to estimate the number of years it will be in use before needing to be retired or replaced. In some cases, determining useful life is a matter of judgment and may be based on predictions about the future. This is because there are no set rules to calculate the number of years to use.
3. How To Account for an Increase in the Useful Life of a Fixed Asset
Since determining the useful life of an asset involves some prediction, changes can arise to increase or decrease the number of years it is expected to be in use. For example, due to unforeseen circumstances leading to early obsolescence or regular maintenance extending the life of the asset.
To account for an increase in the useful life of a fixed asset, the remaining life of the asset should be adjusted and depreciation calculated on the revised number of years.