What is the difference between amortization and depreciation?

Answer:

The cost of a business asset may be the cost each year over the life of the asset. The expense amounts are subsequently used as a tax deduction reducing tax liability for the business.

Because very few assets last forever, the final number of years is calculated, which is called the useful life of the asset. In this article we will look at three common methods used by business to distribute the cost of assets. The key difference between all three methods includes the Type of asset to expense.

Depreciation

Depreciation is a write-off of fixed assets over their useful life. The principal assets of the tangible assets, i.e. tangible assets and can be affected. Some examples of fixed or tangible assets, which are usually amortiziruemoe include:

  • Buildings
  • Equipment
  • Office furniture,
  • Means,
  • Earth
  • Machines.

Because tangible assets may have some value at the end of its life, the impairment is calculated by subtracting the asset’s residual value or salvage value from its original cost. The difference amortiziruemoe evenly during the year of the expected life of the asset. In other words, the balance of expenditure in each year is a tax deduction for the company until the useful life of the asset has expired.

For example, an office building can be operated for many years before it becomes running and sold. The cost of the building is spread out over a projected service life of the building, while part of the cost of expenses in each reporting year.

Depreciation of fixed assets can be done in an expedited manner, which means that most of the cost of the asset costs in the first years of life of the asset. For example, as a rule, amortiziruemoe in an expedited manner.

Depreciation

Depreciation is the practice of distributing cost of an intangible asset over the useful life of the asset. Intangible assets intangible assets as such. Examples of intangible assets are expensed through depreciation may include:

  • Patents and trademarks
  • Franchise agreements
  • Corporate processes, such as copyright
  • The cost of issuing bonds to raise capital
  • Organizational costs

Unlike depreciation, amortization expenses typically on a straight-line basis, i.e. the same amount charged to expense in each period over the useful life of the asset. In addition, the assets are charged to expense using the depreciation method, usually do not have any resale or liquidation value, in contrast to depreciation.

It is important to note the context when using the term depreciation, as it carries a different meaning. The depreciation schedule is often used to calculate number of loan payments, consisting of principal and interest in each payment, as in the case with a mortgage. The term amortization is used in accounting and in lending to very different definitions and uses.

Exhaustion

Depletion refers to the allocation of the cost of natural resources over time. For example, an oil well has a finite life before all the oil is pumped out. Thus, the cost of installation of oil wells scattered throughout the projected life is good.

With depreciation, amortization, and depletion of all three methods of non-cash expenses from the cash invested during these years they are written off. In addition, it is important to note that in some countries, such as Canada, the terms amortization and depreciation are often used interchangeably to refer to both tangible and intangible assets.

For more information, see appreciating depreciation.

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