The period over which fixed asset is expected to be used by the enterprise is called:

Useful life of an asset

The correct answer is option 2- Useful life of an asset.

The amount of depreciation basically depends upon three factors, i.e. Cost, Useful life and Net realisable value. Cost of a fixed asset is “the total cost spent in connection with its acquisition, installation and commissioning as well as for add item or improvement of the depreciable asset”. Useful life of an asset is the “period over which it is expected to be used by the enterprise”.

Useful life of an asset is the estimated economic or commercial life of the asset. Physical life is not important for depreciation purpose because an asset may still exist physically but may not be capable of commercially viable production. For example, a machine is purchased and it is estimated that it can be used in production process for 5 years. After 5 years the machine may still be in good physical condition but can’t be used for production profitably, i.e., if it is still used the cost of production may be very high. Therefore, the useful life of the machine is considered as 5 years irrespective of its physical life. Estimation of useful life of an asset is difficult as it depends upon several factors such as usage level of asset, maintenance of the asset, technological changes, market changes, etc. As per Accounting Standard – 6 useful life of an asset is normally the “period over which it is expected to be used by the enterprise”. Normally, useful life is shorter than the physical life. The useful life of an asset is expressed in number of years but it can also be expressed in other units, e.g., number of units of output (as in case of mines) or number of working hours.