Differences: Depreciation & Amortization
Depreciation and amortization are both common accounting terms, especially for businesses that tend to own a number of different asset types. The businesses need a way to record the value of these assets in a reliable way. The Internal Revenue Service says that most long-term assets --- assets that help the company earn revenue for more than a year --- must be capitalized, or have their expense drawn out over the years of useful life. This causes the asset to lose worth over a period of time while also spreading out the expense of the item for the business over years instead of the moment of purchase. Depreciation and amortization are different facets of this process.
Other People Are Reading
-
Depreciation
-
Depreciation is the loss of value that a physical asset goes through as it ages. This lowers the resale value of the asset as long as the business holds it, but also represents the cost the business can record as the product is used, equating expense with innate value. The most common example that individuals come across in depreciation is automobiles, which depreciate very quickly in the years after they have been bought, so an owner can trade in a car at only a fraction of the cost it was bought for.
Amortization
-
Amortization refers to capitalization of assets that are not physical, which are known as intangible assets. People own intangible assets like copyrights and patents, which represent ideas instead of objects but still have considerable value to people and companies. These intangible assets also have a useful life, only their expense spread through the years is known as amortization instead of depreciation. Amortization expenses can divide the cost of getting a patent equally among the number of years the patent is held.
-
Schedules
-
Both depreciation and amortization have associated schedules. These schedules give the asset a specific useful life, based on a certain number of years, then allow businesses a limited number of options on how to record the expenses paid for either physical or intangible assets. For instance, an accelerated depreciation schedule allows the company to record a large amount of the expense in the first few years of product use and much less later on as the product ages.
Effects on a Company
-
Depreciation and amortization both decrease company earnings. In other words, when a company records the expense each year, it lowers the company's revenues for that year, even if the entire price was paid back when the asset was first purchased. This allows companies to control how high their revenue is by choosing different types of depreciation and amortization schedules.
-
