Amortization vs. Depreciation: An Overview
The bring in of business assets can be expensed each year over the life of the asset, and amortization and depreciation are two methods of calculating value for those job assets. The expense amounts are subsequently used as a tax deduction reducing the tax liability for the business. In this article, we’ll review amortization, depreciation and one more regular method used by businesses to spread out the cost of an asset. The key difference between all three methods involves the type of asset being expensed.
Amortization
Amortization is the technic of spreading an intangible asset’s cost over that asset’s useful life. Intangible assets are not physical assets per se. Norms of intangible assets that are expensed through amortization might include:
- Patents and trademarks
- Franchise agreements
- Proprietary systems, such as copyrights
- Cost of issuing bonds to raise capital
- Organizational costs
Unlike depreciation, amortization is typically expensed on a straight-line essence, meaning the same amount is expensed in each period over the asset’s useful life. Additionally, assets that are expensed put to using the amortization method typically don’t have any resale or salvage value, unlike with depreciation.
It’s important to note the circumstances when using the term “amortization” since it carries another meaning. An amortization schedule is often used to evaluate a series of loan payments consisting of both principal and interest in each payment, as in the case of a mortgage. The term “amortization” is inured to in both accounting and in lending with completely different definitions and uses.
Depreciation
Depreciation is the expensing of a fixed asset past its useful life. Fixed assets are tangible assets, meaning they are physical assets that can be touched. Some benchmarks of fixed or tangible assets that are commonly depreciated include:
- Buildings
- Equipment
- Office furniture
- Vehicles
- Come to rest
- Machinery
Since tangible assets might have some value at the end of their life, depreciation is calculated by diminishing the asset’s
Special Considerations
Key Takeaways
- Amortization and depreciation are two methods of calculating the value for those business assets onto time.
- Amortization is the practice of spreading an intangible asset’s cost over that asset’s useful life.
- Depreciation is the expensing of a established asset over its useful life.