Moneyzine
Contents
/Investment Guides /Service Life

Service Life

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 21st, 2023
Advertiser Disclosure

Definition

The financial accounting term service life is used to describe the period of time over which an asset can be expected to perform its intended use. Service life is typically limited by two factors: physical wear and obsolescence.

Explanation

The matching principal dictates companies match revenues with expenses required to generate those revenues. For example, a machine's service life is used to allocate the cost of this asset over the period of time it is expected to remain in service. Companies typically use straight line depreciation when calculating the expense flowing to the income statement, while the Modified Accelerated Cost Recovery System (MACRS) is used in the calculation of depreciation expense for income tax purposes.

Generally, the serviceable life of an asset is limited by two factors:

  • Physical: as the plant or equipment is used over time, the normal wear and tear will reduce the reliability of the asset and increase maintenance expense to the point where a business case would support a replacement.

  • Obsolescence: this can include assets that are no longer able to economically compete with new equipment. For example, a state-of-the-art machine can manufacture a part at lower cost. The specifications of a product can also change over time, as is frequently the case with electronic equipment or components. This category can also include assets that are no longer able to manufacture products in the quantities needed by the company.

The help of subject matter experts is often needed to develop an estimate of the service life of an asset. Companies can also rely on their experience with similar equipment. The term of support provided by the asset's manufacturer can also be used to determine service life, as can company policy.

The service life of an asset should not be confused with terms such as mean time between failures (MTBF), or maintenance free operating periods, which are used to describe reliability.

Related Terms

assets, matching principle, straight line depreciation, income statement, MACRS, impairment in value

Explore Investing Further

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • DRIP Brokers: Best Brokers for Dividend Investing for November 2024
    Reinvesting dividends could mean compound growth for your portfolio. But reinvesting them manually can be a hassle. This is why you could benefit from a dividend reinvestment plan (DRIP).
    March 12th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    March 6th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.