depreciation and amortization

Amortization and Depreciation are two ways to calculate value of business assets. The overall expense of business assets can be calculated each year over the life of the asset.

There are three different ways used by businesses to spread out the cost of an asset. Major difference being the type of asset being used.

Topics covered

  1. Key takeaways from the blog
  2. Amortization
  3. Depreciation

1. Key takeaways from the blog

  1. Amortization and depreciation are both different ways to calculate the value of business assets over the time.
  2. Any business will calculate these expense amounts in order to use them as a tax deduction and reduce the tax liabillity.
  3. Amortization is practice of spreading an intangible asset’s cost over that asset’s useful life.
  4. Depreciation is the expensing of a fixed asset over it’s useful life.

Let’s now solely understand about amortization.

2. Amortization

This is a process of calculating an intangible asset’s cost over the asset’s life time. Intangible assets are not physical assets.

List of Intangible assets :

  • Cost from organisation
  • Expenditure on issuing bonds for raising capital for the firm.
  • Expense on copyrights, patents and trademarks.

Unlike Depreciation, amortization is expensed equally over each period of asset’s complete lifetime.

Depreciation and amortization

What is Depreciation and Amortization?

These assets which we expense on amortization basis are not having any resale or salvage value. ( Depreciation does! )

3. Depreciation

It is the expense of a fixed asset over it’s useful life. These are tangible assets meaning they are physical assets that can be touched.

Tangible assets example :

  • Buildings
  • Furniture
  • Vehicals
  • System
  • Machinery
  • Piece of land

All tangible assets have a resell value even after their life time so depriciation is calculated by subtracting the resell value from it’s original cost.

The difference is depreciation equally over the years of the assets life time.

Simple example of depreciation is office building cost. It can be used for many years until it is ruined and comes to position where you have to sell it.

The actual cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed in each accounting years.

Note : One more major factor which you will get to understand from the video linked with the blog. It’s known as Depletion and it is the third way to calculate the expense based on the assets.

Hope you got the learn everything about amortization, depreciation and depletion, stay tuned for more upcoming blogs.


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