The term Useful life in Accounting, is used for Fixed Asset Accounting. Fixed Assets always are having certain life, during which asset is expected to provide benefits to an entity.
The expenditure on purchase of Fixed Asset is always very high & is non-recurring in nature.
Fixed Assets are capitalized & get depreciated over the period of its life. In other words, it is an estimation of number of years, that the Asset is remain in service for the purpose of cost effective revenue generation.
The idea behind this is, since this is a Capital expenditure & is non-recurring in nature, it cannot be debited to Profit and Loss account. Otherwise current year profit will get affected badly with this nature of expenditure. Whereas, this is charged off over the period, to the extent of life of an Asset.
Now how much is to be charged & for how many years? Here the concept of useful life of an Asset is come in picture. This is the tool of measurement of purchase value to charge off in Profit & Loss Account.
Example :
A Machinery is purchased worth of Rs. 1 crore having a life of 10 years, during which the asset is expected to provide benefits to an entity. The depreciation is charged for 10 years @ Rs. 10 lakhs per annum (considering Straight Line method of depreciation).
‘Useful Life’ is different from ‘Physical Life’ of an Asset.
Physical life is always more than the useful life. After the useful life, the asset is not expected to provide benefits & is needs to be replaced. It is expected to get worn-out and up-gradation is require.
