How to Calculate Depreciation & Amortization

Calculating depreciation and amortization helps identify a company's real earnings.

In the world of accounting, there are two different types of transactions: cash and non-cash. This designation is important for the accountant; however, it makes analyzing a company's real earnings tricky. Two non-cash accounts are depreciation and amortization. Depreciation is the amount expensed annually to account for the wear and tear on assets. Amortization is the same thing as depreciation for intangible assets like patents or copyrights. There are several different ways to calculate depreciation and amortization, but the most common method is referred to as the straight-line method.

Instructions

1. Determine the original cost of the asset. For physical assets, this amount is usually supported with a receipt. For intangible assets, this amount is calculated as the sum of all the work and research that went into the asset, i.e., patent or copyright.

2. Determine the useful life of the asset. This is the number of years the asset will be of value. For instance, the useful life of a brand new car usually coincides with the warranty. However, the useful life of an intangible asset is only as good as the contract. Most patents last for 20 years.

3. Divide the cost of the asset by the useful life for the annual depreciation or amortization expense. For instance, if the cost of a truck with a useful life of five years is $50,000, the depreciation expense is $10,000.

References

• Investopedia: Amortization
• Investopedia: Depreciation
• LawFreeAdvice: How long does a patent last?