What is the Difference Between Depreciation and Amortization?
🆚 Go to Comparative Table 🆚Depreciation and amortization are both methods used to calculate asset value over a period of time, but there are key differences between the two concepts:
- Asset Types: Depreciation is used for tangible assets, such as buildings, equipment, land, machinery, office furniture, and vehicles, while amortization is used for intangible assets, like franchise agreements, proprietary processes, trademarks, patents, and organizational costs.
- Depreciation Methods: There are several depreciation methods a company can choose from, such as the straight-line method, double declining balance method, or sum-of-the-years' digits (SYD) method. In contrast, amortization is typically expensed on a straight-line basis, meaning the same amount is expensed in each period over the asset's useful lifecycle.
- Salvage Value: When calculating depreciation, the salvage value (resale value at the end of the asset's useful life) is usually factored in. Intangible assets, on the other hand, generally do not have any resale value at the end of their useful life, so this factor is not considered in amortization calculations.
- Financial Statements: Both depreciation and amortization are recorded as expenses on the income statement. However, the methods of calculating these expenses and the assets they apply to are different.
In summary, depreciation is used for tangible assets and can be calculated using various methods, while amortization is used for intangible assets and is typically calculated using the straight-line method. Both concepts help businesses spread the cost of assets over their useful lives and recognize expenses accordingly.
Comparative Table: Depreciation vs Amortization
Depreciation and amortization are both methods used to reduce the value of an asset over time. However, they are applied to different types of assets and serve different purposes. Here is a table highlighting the key differences between depreciation and amortization:
| Feature | Depreciation | Amortization |
|---|---|---|
| Applicability | Tangible assets (e.g., plant and machinery, vehicles, computers, furniture) | Intangible assets (e.g., royalty, copyright, computer software, import quotas) |
| Purpose | Reduces the value of tangible assets due to use, obsolescence, accident, and wear and tear | Allocates the cost of intangible assets over their useful life to match the cost with the revenue generated |
| Methods | Several depreciation methods, including straight-line, declining balance, and sum-of-the-years'-digits | Almost always conducted using the straight-line method |
| Salvage Value | Tangible assets may have some salvage value, which is considered in depreciation calculations | Intangible assets are not typically considered to have any resale value once their useful life is over |
In summary, depreciation is used for tangible assets and is based on factors such as use, obsolescence, and wear and tear, while amortization is used for intangible assets and is based on allocating the cost of the asset over its useful life.
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