Difference between Depreciation and Amortization

Key difference: Depreciation refers to prorating a tangible asset's cost over that asset's life. Amortization usually refers to spreading an intangible asset's cost over that asset's useful life.

Both depreciation and amortization are methods of cost recovery, and are used to allocate the cost of the asset over its useful life. While, they are similar in many ways, there are some key differences. The biggest difference is that depreciation is used for a tangible asset, whereas, amortization is for intangible assets. Tangible assets are things you can touch and feel, such as land, plant, machinery, etc. Intangible assets that you cannot touch, i.e. loan amounts, patents, trademarks, goodwill, etc.

Depreciation spreads the cost of tangible assets over a number of years. It takes into account the wear and tear of the assets. Once the asset is owned, it starts depreciating. The income tax laws and company laws decide which method of depreciation to use and which manner to use it in.

Amortization, on the other hand, spreads the cost of the intangible asset over its useful life. It mainly deals with the capitalized expenditure and preliminary expenditure of the asset. Amortization is fixed by company’s law and can rapidly change.

 

Depreciation

Amortization

Definition

The reduction in the value of an asset due to usage, passage of time, wear and tear, technologically outdated or obsolescence and other such factors.

Spreading an intangible asset's cost over that asset's useful life.

Concept

To prorate a tangible asset's cost over that asset's life.

To spread capitalized expenditure and preliminary expenditure of the asset over the useful life of the asset.

Purpose

Cost recovery

Cost recovery

Used for

Tangible assets like building, furniture, plant and machinery.

Intangible assets like patents, goodwill, trademarks, loans etc.

Methods

Straight-line depreciation, declining-balance method, activity depreciation, sum-of-years' digits method, units-of-production depreciation method, units of time depreciation, group depreciation method, composite depreciation method, tax depreciation

Business amortization, negative amortization zoning amortization

Examples

The cost of the building is spread out over the predicted life of the building. The value of a car decreases over years.

The loan principal decreases over the life of a loan. The cost involved with creating the equipment is spread out over the life of the patent for that equipment.

Image Courtesy: emicalculator.net, techtreme.com

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Comments

Very clear defind biffrns between DP& AMO

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