The service life or useful life of an asset is best defined as:

• A. The period from the purchase of the asset until it is sold.
• B. The length of time an asset is physically capable of functioning.
• C. The period over which an asset is expected to be economically useful to the company.
• D. The time it takes for an asset to be fully depreciated for tax purposes.

Answer: (C)

Verified step by step guidance

1. Understand the concept of 'useful life' in financial accounting: Useful life refers to the estimated period during which an asset is expected to contribute economically to the company. It is not necessarily tied to the physical lifespan of the asset or its depreciation schedule for tax purposes.
2. Clarify the distinction between physical life and useful life: Physical life is the total time an asset can function, while useful life is the time it is economically beneficial to the company. For example, a machine may physically last 20 years, but its useful life might be only 10 years due to technological obsolescence.
3. Recognize that useful life is an estimate: Companies determine the useful life of an asset based on factors such as expected usage, wear and tear, technological advancements, and market conditions. This estimate helps in calculating depreciation.
4. Understand the role of useful life in depreciation: Depreciation is calculated over the useful life of an asset, spreading its cost over the period it is expected to generate economic benefits. This aligns with the matching principle in accounting.
5. Review the correct definition: The useful life of an asset is best defined as 'the period over which an asset is expected to be economically useful to the company,' as this focuses on its economic contribution rather than physical capability or tax depreciation schedules.