Useful Life

The length of time you can contribute to society. Then, it's onto the ice floe for you...

In finance, the term "useful life" refers to an accounting concept. It helps determine how much depreciation gets realized in any given year.

You run a factory that makes taffy-like flavored salad dressings (Seaside Caesar is your biggest seller). You buy a new taffy puller. You need to figure out what depreciation for the machine should be, so that you can calculate it properly for your financial statements.

First step, define a useful life.

You buy the industrial taffy puller for $50,000. A typical machine of that type will last 10 years. An old used-up husk of a puller can be sold for $5,000 in scrap value. So, 10 years from now, you'll have a $5,000 asset...the scrap value for the puller. Over that time, the value will depreciate $45,000...from the $50,000 you spent to buy it to the $5,000 scrap value. Assuming straight-line depreciation, that means depreciation should equal $4,500 a year.

That estimate doesn't mean your taffy puller will definitely be cooked in 10 years. Keep it oiled and spit-shined over that time and you might get 12 years out of it, or 15 years, or whatever. Maybe it will conk out in eight years. Maybe the sun will expand unexpectedly and we'll all be dead next month. Who knows?

Useful life doesn't define how long an asset will be usable with any certainty; it's an estimate that leads to a reasonable, defendable depreciation figure.