BROWSE

Economic Life

What is 'Economic Life'

Economic life is the expected period of time during which an asset is useful to the average owner. The economic life of an asset could be different than its actual physical life. Estimating the economic life of an asset is important for businesses so that they can determine when it is worthwhile to invest in new equipment and they can allocate appropriate funds to purchase replacements once the equipment has exceeded its useful life.

Explaining 'Economic Life'

The economic or useful life of an asset under the Generally Accepted Accounting Principles (GAAP) requires a reasonable estimate of the time involved. Businesses can shift their measurements based on the anticipated daily usage and other factors. The concept of economic life is also connected to depreciation schedules. Accounting standards bodies usually set generally accepted guidelines for estimating and adjusting this time period.

Finance and Economic Life

Financial considerations regarding the economic life of an asset include the cost at the time of purchase, the amount of time the asset can be used in production, the time at which it will need to be replaced, and the cost of maintenance or replacement. Changing industry standards or regulations may also be involved. New regulations may render current equipment obsolete or raise the required industry standards for an asset beyond the specifications of a business's existing assets. Further, the economic life on one asset may be tied to the useful life of another. In cases where two separate assets are required to complete a task, the loss of one asset may render the second asset useless until the first asset is repaired or replaced.

Economic Life and Depreciation

Depreciation refers to the rate at which an asset deteriorates over time. The depreciation rate is used to estimate the effects of aging, daily use, and wear and tear on the asset. When related to technology, depreciation can also include the risk of obsolescence.


Further Reading


Governing economic life
www.tandfonline.com [PDF]
… or so it has also started to generate new topics of its own, such as business groups, finance, and law … In the New Institutional Economics, the emergence and maintenance of social institutions is typically explained through their … Economic life in these early societies was instead …

Diversity in entrepreneurship: ethnic and female roles in urban economic lifeDiversity in entrepreneurship: ethnic and female roles in urban economic life
www.emerald.com [PDF]
… or so it has also started to generate new topics of its own, such as business groups, finance, and law … In the New Institutional Economics, the emergence and maintenance of social institutions is typically explained through their … Economic life in these early societies was instead …

Economics for (and by) humansEconomics for (and by) humans
www.tandfonline.com [PDF]
… or so it has also started to generate new topics of its own, such as business groups, finance, and law … In the New Institutional Economics, the emergence and maintenance of social institutions is typically explained through their … Economic life in these early societies was instead …



Q&A About Economic Life


Why do businesses need to determine when it is worthwhile to invest in new equipment and they can allocate appropriate funds to purchase replacements once the equipment has exceeded its useful life?

Businesses need to determine when it is worthwhile to invest in new equipment and they can allocate appropriate funds to purchase replacements once the equipment has exceeded its useful life so that they can keep up with industry standards or regulations, changing industry standards or regulations may also be involved. New regulations may render current equipment obsolete or raise the required industry standards for an asset beyond the specifications of a business's existing assets. Further, the economic life on one asset may be tied to the useful life of another. In cases where two separate assets are required to complete a task, loss of one asset may render second asset useless until first asset is repaired or replaced. Depreciation refers not only how fast an item wears out but also how long it will last before needing replacement due if there are no parts available for repair, if technology changes rendering old items unusable, etc.. When related technology depreciation includes risk obsolescence (the risk that newer technologies will make older technologies obsolete).

How can economic life be different than physical life?

Economic life can be different than physical life.

What is the expected period of time during which an asset is useful to the average owner?

The expected period of time during which an asset is useful to the average owner.