Service life and depreciation

Distributing expense across the life of an asset

When we talk about the life of an asset, we’re referring to how long something can be used.

In accounting, depreciation is an accounting process of recording the decreases in the value of an asset over time.

Service life

Service life, also known as the useful life or economic life, is how long a business can expect to use an asset effectively.

It’s an estimate of how many years the asset will be useful and help the business.

Service life is important because it forms the basis for calculating depreciation.

By taking depreciation into account, it will help better:

• Manage assets

• Plan budgets

• Predict when it might be time to replace an asset

Depreciation process

When businesses acquire assets like buildings or equipment, they determine their initial value based on the actual purchase cost and any expenses incurred to get them ready for use.

Calculating depreciation

The amount of depreciation that can be taken over each accounting period is determined by tax laws.