Amortization vs. Depreciation — What's the Difference?
By Tayyaba Rehman — Updated on October 5, 2023
Amortization refers to spreading an intangible asset's cost over its useful life, while Depreciation is the allocation of a tangible asset's cost over its useful lifespan.
Difference Between Amortization and Depreciation
Table of Contents
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Key Differences
Amortization is a financial term used primarily for intangible assets, spreading the cost of these assets over their expected life. Depreciation, on the other hand, refers to tangible assets like machinery and buildings, allocating the decline in value across its operational life. It is essential to understand that the principle behind both is similar, accounting for the reduction in value or utility of assets over time. However, the distinction lies in the nature of the assets they relate to.
In a business context, amortization might be applied to assets like patents, goodwill, or copyrights. These are assets that don't have a physical presence but hold value for a business. Depreciation, conversely, pertains to assets you can touch, see, and feel – things like vehicles, computers, and machinery. Their wear and tear or obsolescence causes their value to diminish, leading to depreciation.
Another distinction is in the method of calculation. While numerous methods can calculate both amortization and depreciation, amortization is often done on a straight-line basis. In contrast, depreciation might involve methods like declining balance or sum-of-the-years' digits. It is noteworthy that both amortization and depreciation are essential for tax and accounting purposes, helping businesses account for and reduce the book value of assets over time.
Lastly, while both terms represent the diminution in the value of assets, their implications differ. Amortization often links to intangible assets whose value diminishes due to external factors like the expiration of a patent. In contrast, depreciation connects more with the physical wear and tear or the inevitable aging of tangible assets.
Comparison Chart
Type of Asset
Intangible
Tangible
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Examples
Patents, goodwill, copyrights
Vehicles, machinery, buildings
Calculation Methods
Often straight-line basis
Various methods including straight-line, declining balance
Reason for Reduction
Factors like expiration or obsolescence
Physical wear and tear, aging
Physical Presence
No
Yes
Compare with Definitions
Amortization
The spreading of cost of an intangible asset over its useful life.
The company started the amortization of the newly acquired patent over ten years.
Depreciation
An accounting method to match costs with revenues.
The depreciation of the production machine was recorded over five years.
Amortization
Expense of certain capitalized costs over time.
The software development costs underwent a five-year amortization.
Depreciation
The reduction in the value of an asset over time due to wear and tear.
The car's depreciation was considered during its resale.
Amortization
The systematic repayment of a loan.
The loan's amortization schedule was provided at the onset.
Depreciation
A decrease in an asset's value due to obsolescence.
Rapid technological changes led to the computer's swift depreciation.
Amortization
The write-off of an asset over time.
The goodwill from the merger underwent amortization over a decade.
Depreciation
The inevitable decline in the value of property.
The building faced depreciation due to its aging infrastructure.
Amortization
The process of reducing a debt through regular payments.
The mortgage amortization period is 30 years.
Depreciation
In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used (depreciation with the matching principle).Depreciation is thus the decrease in the value of assets and the method used to reallocate, or "write down" the cost of a tangible asset (such as equipment) over its useful life span. Businesses depreciate long-term assets for both accounting and tax purposes.
Amortization
Amortization (or amortisation; see spelling differences) is paying off an amount owed over time by making planned, incremental payments of principal and interest. To amortise a loan means "to kill it off".
Depreciation
A decrease or loss in value, as because of age, wear, or market conditions.
Amortization
The act or process of amortizing.
Depreciation
(Accounting) An allowance made for a loss in value of property.
Amortization
The money set aside for this purpose.
Depreciation
Reduction in the purchasing value of money.
Amortization
In reckoning the yield of a bond bought at a premium, the periodic subtraction from its current yield of a proportionate share of the premium between the purchase date and the maturity date.
Depreciation
An instance of disparaging or belittlement.
Amortization
The reduction of loan principal over a series of payments.
Depreciation
The state of being depreciated; disparagement.
Amortization
The distribution of the cost of an intangible asset, such as an intellectual property right, over the projected useful life of the asset.
Depreciation
The decline in value of assets.
Amortization
The act or right of alienating lands to a corporation, which was considered formerly as transferring them to dead hands, or in mortmain.
Depreciation
(accounting) The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the unplanned, extraordinary decline in value of assets.
Amortization
The extinction of a debt, usually by means of a sinking fund; also, the money thus paid.
Depreciation
The act of lessening, or seeking to lessen, price, value, or reputation.
Amortization
The reduction of the value of an asset by prorating its cost over a period of years
Depreciation
The falling of value; reduction of worth.
Amortization
Payment of an obligation in a series of installments or transfers
Depreciation
The state of being depreciated.
Depreciation
A decrease in price or value;
Depreciation of the dollar against the yen
Depreciation
Decrease in value of an asset due to obsolescence or use
Depreciation
A communication that belittles somebody or something
Depreciation
The allocation of an asset's cost over its useful life for accounting.
The office equipment's depreciation is recorded annually.
Common Curiosities
How does a company usually calculate amortization?
Amortization is often calculated on a straight-line basis.
Can amortization apply to loans?
Yes, amortization can refer to the systematic repayment of a loan over time.
Why is amortization essential for intangible assets?
It helps businesses account for the reduction in value of intangible assets over time.
Why do businesses record depreciation?
Depreciation helps in accounting for the wear and tear or obsolescence of tangible assets over time.
What does "depreciation" primarily pertain to?
Depreciation refers to the allocation of the cost of tangible assets over their useful lifespan.
Can land be amortized or depreciated?
Land typically doesn't depreciate or undergo amortization as it's often considered to have an indefinite life.
What does "amortization" primarily pertain to?
Amortization relates to the spreading of the cost of intangible assets over their useful life.
Are there multiple methods to calculate depreciation?
Yes, there are various methods like straight-line, declining balance, and sum-of-the-years' digits.
Does depreciation always denote physical wear and tear?
While often due to physical wear and tear, depreciation can also arise from obsolescence.
Do both amortization and depreciation impact a business's financial statements?
Yes, both influence the income statement and balance sheet of a business.
How does amortization impact a company's equity?
Amortization reduces assets and earnings, which in turn can decrease a company's equity.
What's an example of an intangible asset that undergoes amortization?
Patents, which lose value as they approach expiration, undergo amortization.
Do all tangible assets depreciate?
Most tangible assets depreciate over time due to wear and tear or obsolescence, but the rate and method can vary.
Are amortization and depreciation tax-deductible?
Yes, both are often tax-deductible expenses for businesses.
How does obsolescence relate to depreciation?
Obsolescence, or becoming outdated, can be a reason for an asset's depreciation.
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Written by
Tayyaba RehmanTayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.
