We explain that what is the difference between depreciation and amortization with table. Businesses incur costs in various ways. It is always a balance between cost and income that makes a business function properly.
The income obtained is also due to spending on various fronts. The calculated costs incurred to earn profitable income is a business strategy.
Of course, keeping people in harmony, managing money, and increasing productivity, it all comes down to a single image. But there is more to it than that to keep businesses running for a long time.
It is the control and safeguarding and repurchase of assets. This also has a cost, it can be the renewal of labor, the purchase of new machinery or the renewal of a patent or copyright license.
The value of a particular purchase decreases day by day for many reasons. What remains constant is the reduction in value.
Companies calculate this meticulously, as they also remain the main part of the functionality of the industry. The reduction in value of a particular asset is classified into two types; Depreciation and amortization.
Both play a vital role in the successful running of a business and there are many differences between them. The main difference between depreciation and amortization is the reduction in the cost of tangible fixed assets during their useful life, which is directly proportional to the use of the asset during a specific year, while amortization is the reduction in the cost of intangible assets during their useful life. useful life.
Comparison table between depreciation and amortization (in tabular form)
Comparison parameter Depreciation Amortization
| Meaning / Definition | It is the reduction in the cost of tangible assets during their useful life that is proportional to the use of the asset in a specific year. | It is the reduction of the cost of intangible assets throughout their useful life. |
| Applicable to | It applies to tangible assets such as machines, equipment, furniture, and buildings. | It applies to intangible assets such as patents, licenses, copyrights, agreements. |
| Deployment method | Depreciation can be done using the straight line method (SLM) or the accelerated depreciation method. | Amortization can be done using the straight-line method. |
| Rescue value | Depreciation has salvage value for items whose costs are reduced. | The amortization has no salvage value. It has to be completely redone at the new cost. |
| Expenses and benefits | Depreciation can be used for tax purposes, however quick depreciation can be highlighted as a higher expense in the initial years of service. | Amortization also helps in tax purposes and a higher expense can never be shown in the next few years. |
What is depreciation?
Depreciation is the reduction in the cost of tangible assets available to the company during its useful life that is proportional to the use of the same asset in a specific year. Depreciation is applied to assets such as buildings, machines, equipment, furniture.
Depreciation can be used as a straight-line method or an accelerated depreciation method. Accelerated depreciation is used to show higher expenses in the initial years of construction of a machine, building, or piece of equipment.
Represents the amount of asset value that has been used each year. Assets that depreciate, of course, generate income and a portion of the income is allocated as a cost to maintain the asset and produce income next year as well.
Businesses may very well take tax breaks on depreciating items. As such, that will also not be included in taxable income.
It is also widely understood that depreciation costs must be widely distributed over some time for tax purposes. The rules are strict when it comes to tax cuts. An asset that depreciates has its own cost over time. The sum of all the depreciation that occurs in the asset’s useful life is called accumulated depreciation.
What is Amortization?
Amortization is the reduction in the cost of intangible items during their useful life. Amortization applies to patents, licenses, rental agreements, copyrights.
Amortization refers to two things, one is the settlement of debts through strict installments and the other is the distribution of expenses related to intangible assets over a period of time. The period will normally be the entire useful life of the intangible asset.
Amortization can also be used for tax purposes. It can be used as a straight line method.
Amortization is a cost linked to the intangible asset that must be adjusted with the income generated by the tangible asset. The value of intangible assets continues to decline every year.
Amortization is mainly related to the debt that the company has. The highest percentage of amortization goes towards the principal amount of the loan, the rest is the interests to be paid.
Depreciation assets cannot earn any redemption value benefit as they cannot be resold. Amortization is simply viewed as an expense to the business. In the balance sheets, the recording of the amortization will be done as a part of the cost and not the total cost. This is done in each accounting period of a financial year.
Main differences between depreciation and amortization
- The main difference between depreciation and amortization , that is, depreciation is the reduction in the cost of the tangible asset during its useful life that is proportional to the use of the asset in a specific year, while amortization is the reduction in the cost of intangible assets during its useful life.
- Depreciation applies to tangible assets such as furniture, equipment, buildings, machinery, while depreciation applies to licenses, patents, copyrights, and trademarks.
- Depreciation can be used as a straight line method or an accelerated depreciation method, while AMortization can be used only as a straight line method.
- Depreciation has the salvage value of the asset as it can be resold, while depreciation does not have the benefit of the salvage value.
- There are tax benefits for both depreciation and amortization, however, depreciation has higher benefits as higher expenses can show through accelerated depreciation in the initial years of service, whereas such benefit is not available to amortization.
Final Thought
Businesses incur many costs, and cost can also help profit. It is the strategy of working under the law to look at these benefits that are offered. While tangible assets are necessary to generate income, intangible assets are necessary for safety and market branding.
Both must be incurred for the proper functioning of an economic cycle. The role played by both in the industry requires expert auditors and account personnel to work on the numbers. After all, taxes are government related, and producing the correct documents for the cost incurred must be legitimate.
