What is the importance of the useful life when it comes to depreciating an asset?

The useful life of an asset is an accounting estimate of the number of years it is likely to remain in service for the purpose of cost-effective revenue generation. The Internal Revenue Service (IRS) employs useful life estimates to determine the amount of time during which an asset can be depreciated.

What are the factors that are considered in determining the useful life of an asset?

Factors involved in determining the useful life of a tangible asset include the age of the asset when purchased, how frequently the asset is used, and the environmental conditions of the business that purchased the asset.

Under which circumstances useful life of a depreciable asset is shorter than its physical life?

Under the following circumstances, useful life of a depreciable asset is shorter than its physical life and is : (i) Pre-determined by legal or contractual limits such as the expiry dates of related leases. (iv) reduced by obsolescence arising from such factors as : technological changes.

What is the purpose of depreciating long term assets in financial reporting?

The purpose of depreciation is to achieve the matching principle of accounting. That is, a company is attempting to match the historical cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset.

What is an estimated useful life?

Useful life is “an estimate of the average number of years an asset is considered useable before its value is fully depreciated.” 1.

What is the importance of useful life of a building?

Useful life is an important concept in accounting because it is used to work out depreciation. Depreciation is the process of expensing a fixed asset across the number of years it helps generate revenues.

What is estimated useful life?

Can you change the estimated useful life of an asset?

If changing circumstances impact a fixed asset, it is possible that the remaining useful life will also be changed; this impacts the remaining amount of depreciation that has not yet been recognized, but has no impact on depreciation that has already been recognized in prior periods.

What is the estimated useful life of a building?

Buildings are normally depreciated over a useful life of 40 years.

What is the purpose of long-term assets?

Long-lived assets, also referred to as non-current assets or long-term assets, are assets that are expected to provide economic benefits over a future period of time, typically greater than one year. Long-lived assets may be tangible, intangible, or financial assets.

Why must a long lived tangible asset be depreciated?

Once acquired, the cost of a long lived asset is usually depreciated (for tangible assets) or amortized (for intangible assets) over the expected useful life of the asset. This is done in order to match the ongoing use of the asset with the economic benefits derived from it.

What is depreciation residual value and useful life?

The residual value will influence the total depreciable amount a company uses in its depreciation schedule. Generally, the useful life or lease period is inversely related to the residual value of an asset. If you lease a car for three years, its residual value is how much it is worth after three years.