Sunday, February 2, 2014

Economic Life

Definition of 'Economic Life'
The expected period of time during which an asset is useful to  average owner. The economic life of an asset is different than the actual physical life of the asset. Estimating the economic life of an asset is important for businesses so that they can determine when it is worthwhile to invest in new asset. In addition, businesses must plan so that they have sufficient funds to purchase replacements for expensive equipment once, it has exceeded its useful life; explains 'Economic Life'
The concept of economic life is also connected to depreciation schedules; Accounting standards bodies usually set generally accepted guidelines for estimating & adjusting this time period. In theory, businesses recognize depreciation expenses on a schedule that approximates the rate at which economic life is used. 

This is always not true for tax purposes, however. Because owners may have superior information about specific assets, the economic life used in internal calculations may differ significantly from the depreciable life required for tax purposes, In addition, many businesses recognize depreciation expense differently based oon management's goals. For exampl, a business might want to recognize costs as quickly as possible in order to minimize current tax liabilities & may do this by choosing accelerated depreciation schedules.   

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