Amortization and depreciation are two strategies for determining the worth of a company’s assets over time. They do, however, work in quite distinct ways. There are variations in the methodologies permitted, the components of the computations, and how they are reported on financial statements.
The accounting process of spreading the cost of an intangible asset over its useful life is known as amortization. Intangible assets are not physical, but they are nonetheless valuable. Patents, trademarks, franchise agreements, copyrights, expenses of issuing bonds to raise money, and organizational costs are examples of intangible assets that are expensed through amortization.
The expense of a fixed asset throughout its useful life is known as depreciation. A company’s fixed assets are tangible items that it acquires. Buildings, equipment, office furniture, cars, and machinery are examples of fixed or physical assets that are routinely depreciated. In contrast to intangible assets, they may have some value after the firm no longer needs them.
Amortization vs. Depreciation
Depreciation is, by definition, only applicable to real, tangible assets whose expenses are dispersed over their valid lifetimes. In contrast, amortization solely applies to intangible assets. Almost all intangible assets are amortized using the straight-line technique during their useful life. This implies that the same amount of amortization expenditure is reported each year. On the other hand, a firm has many depreciation methodologies from which to pick. These choices differentiate the depreciation expenditure a corporation may recognize in a given year, resulting in differing net income estimates depending on the selected option.
Because salvage value is used, the depreciation and amortization formulas change. The salvage value reduces the depreciable base of a physical item, and the salvage value does not affect the amortization base of an intangible asset. This is frequently because intangible assets have no salvage value, although physical products may have residual worth.
|Use to spread the cost of a fixed asset throughout its useful life|
|Assets include land, buildings, and other physical assets|