Posted in Finance, Accounting and Economics Terms, Total Reads: 728
Definition: Economic Life
The Economic life of an asset is the time period during which it is useful to its owner or the period during which it produces a good or service of value. Economic life can be different from the physical life of an asset. The concept of economic life is useful as it helps a business to decide when to invest in new equipment as the old ones become obsolete or depreciates. The economic life of an asset can be really short in fields like electronics and computers where rapid advancements in technology render goods obsolete soon after they are purchased as new models come up.
The concept of economic life of an asset is also useful for tax purposes. As owners may have superior information about the exact useful life period of an asset, the economic life used in internal calculations will differ from those used for depreciating assets for tax purposes. Businesses may choose accelerated depreciation schedules to minimize current tax liabilities by showing that the economic life of the asset has reduced to zero irrespective of its physical life.
For instance, the physical life of an asset can be 10 years but for tax purposes it can be depreciated fully over a period of 5 years. In this case, the economic life of the asset is 5 years.
Asset Value = 10,000
Economic life = 5 years
Using Straight Line Depreciation, Depreciation per year = 10000/5 = 2000