The economic life of an asset is the period during which an asset has the capacity to produce returns for the company.
In other words, it is the time in which an asset has the capacity to generate benefits. What we mean by the word profit is that income is greater than expenses.
When an asset generates less income than costs, it is understood that its economic life has come to an end. Since it makes no sense to maintain, for example, a machine whose maintenance cost is greater than the income derived from its production.
Along these lines, it is important not to confuse economic life with useful life.
Efficient economic life
Now, we must understand this concept as a concept of efficiency . This is because an asset can continue to function properly but is no longer efficient.
Suppose, for example, a computer program. The program may work just as well as when it was purchased, however due to updates to the operating systems it may no longer be efficient.
The asset, in this case intangible , continues to function but is no longer efficient. Therefore, it is understood that the asset is no longer efficient and its economic life has ended.
What is the economic life of an asset?
Economic life will depend on various factors. Not surprisingly, not all assets are efficient during the same period of time. Thus, there will be assets that will have an economic life of 10 years and others of 5 years.
Assets that deal with digital or technological issues usually have a lower economic life than other assets. For example, a real estate (a factory) can be efficient for several decades. On the contrary, the operating system of a computer will be outdated within 10 years.