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.
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:
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.