Useful life is the estimated lifespan of a depreciable fixed asset, during which it can be expected to contribute to company operations. This is an important concept in accounting, since a fixed asset is depreciated over its useful life. Thus, altering the useful life has a direct impact on the amount of depreciation expense recognized by a business per period. For example, altering a useful life from two years to four years doubles the time over which depreciation is recognized, which cuts the amount of depreciation expense recognized per period in half.
If changing circumstances impact a fixed asset, it is possible that the remaining useful life will also be changed; this impacts the remaining amount of depreciation that has not yet been recognized, but has no impact on depreciation that has already been recognized in prior periods.
It is relatively common to assign a standard useful life to every asset recorded within an asset class (such as machinery or computer equipment). Doing so takes away the need to justify the useful life assigned to every individual asset. Instead, if an asset fits the definition of assets recorded within a particular asset class, then the assignment of a useful life is automatic.
As an example of useful life, a fixed asset is purchased at a cost of $10,000. The company controller estimates its useful life to be five years, which means that the business will recognize $2,000 of depreciation expense per year in each of the next five years. If the controller had instead stated a useful life of six years, the annual depreciation would have been $1,667.
The useful life concept has no impact on cash flow, since depreciation is a non-cash expense.
The useful life concept as employed within a business does not necessarily reflect the entire lifespan of an asset; it may be sold off to a third party, which then continues to use the asset for an extended period of time. Thus, the useful life figure used by a business may be a subset of an asset's actual usage period.