The Difference Between Depreciation & Amortization

Amortization and depreciation are methods of expensing different types of assets.

Amortization and depreciation seem like similar functions because both methods are used to allocate the cost of assets over their useful lives. But differences exist between the two methods.

Definition

Amortization refers to the allocation of an intangible asset’s expense over its useful life. Accountants use depreciation to record the cost of a firm's long-term fixed assets.

Distinction

The chief difference between amortization and depreciation is that amortization is used to record the cost of intangible assets, while depreciation is used to allocate the cost of tangible or fixed assets.

Tangible vs. Intangible Assets

Tangible or fixed assets are purchases made by the company that will last longer than one year, such as buildings, furniture and machinery. Intangible assets are nonphysical assets that add value to the company, such as intellectual property, brand recognition and goodwill.

Comparison of Methods

Generally accepted accounting principles allow accountants to use the same methods for amortization and depreciation. However, accountants often choose to spread amortization evenly over an intangible asset’s life, while reserving accelerated depreciation for fixed assets.

Comparison of Schedules

Because amortization and depreciation methods are similar, GAAP does not require any difference in the way they are scheduled. However, accountants often depreciate groups of fixed assets by type, while amortizing a single intangible asset on each amortization schedule.

References

• Investopedia: Amortization
• Investopedia: Depreciation
• Investopedia: Intangible Asset
• Investopedia: Fixed Asset

Resources

• Investopedia: Difference Between Amortization and Depreciation
• Microsoft Office: Capital Asset Depreciation Schedule