Which of the following is a key difference between depreciation and amortization?
Show
Difference Between Depreciation vs AmortizationDepreciation refers to the reduction in the cost of the tangible fixed assets over its lifespan which is proportionate to the use of the asset in that specific year. The example of tangible assets which are depreciated is the plant, equipment, machinery, building, and furniture. Depreciation of tangible assets can be done by using either a straight-line method or an accelerated depreciation method. Amortization refers to the reduction in the cost of the intangible assets over its lifespan. The example of intangible assets which are amortized are patents, trademarks, lease rental agreements, concession rights, brand value, etc. Amortization of the intangible assets is mostly done using the straight-line method. Head To Head Comparison Between Depreciation vs Amortization(Infographics)Below is the top 9 difference between Depreciation vs Amortization Key Differences Between Depreciation vs AmortizationBoth Depreciation vs Amortization are popular choices in the market; let us discuss some of the major Difference Between Depreciation vs Amortization:
Depreciation vs Amortization Comparison TableBelow is the 9 topmost comparison between Depreciation vs Amortization
Examples of Depreciation vs AmortizationBelow are the examples for better understading: Example of DepreciationA Company purchased a machine at $100 million. The life of the machine is 5 Years. The salvage value of the machine is 10% of the purchase value. The depreciation as per the straight-line method is as below:
Now we will find out the Annual Depreciation for the machine by using the Annual Depreciation formula. Annual Depreciation for the Machine = Depreciable value/life of the machine Annual Depreciation for the Machine = 90/5 Annual Depreciation for the Machine = $18 million Calculation of depreciation year on year and reduction in asset value is provided in below table:
Example of AmortizationA Company involved in construction, development, and operation of roads and highways has been granted a toll collection right of $800 million by the highway ministry to be collected over 20 Years. Amortization expenses which the Company can claim under the straight-line method are as under: Annual Amortization Expense = (Value of Toll Collection Right-Salvage Value)/Useful Life Annual Amortization Expense = (800-0)/20 Years Annual Amortization Expense = $40 million Note: Generally, Amortization is implemented using a straight-line method and salvage value of intangible assets are zero. Conclusion – Depreciation vs AmortizationDepreciation vs Amortization both are used to distribute the cost of an asset (be it tangible or intangible) over its useful life. Depreciation is more precisely used for tangible assets and amortization is used for intangible assets. Both Depreciation vs Amortization are recognized as expenses in the revenue statement of the Companies and used for taxation purpose. Both Depreciation vs Amortization broadly serve the purpose of taxation and accounting. Recommended ArticlesThis has a been a guide to the top difference between Depreciation vs Amortization. Here we also discuss the Depreciation vs Amortization key differences with infographics, and comparison table. You may also have a look at the following articles to learn more.
What is the main difference between depreciation and amortization?Amortization is the method that is used to decrease the cost of the asset over time, while depreciation is the loss in value of the asset over time. This understanding helps in better understanding the financial implications of the purchase and saving time, effort, and money.
What is the difference between Amortisation and amortization?Amortization or amortisation may refer to: The process by which loan principal decreases over the life of an amortizing loan. Amortization (accounting), the expensing of acquisition cost minus the residual value of intangible assets in a systematic manner, or the completion of such a process.
What is the difference between depreciation and depreciation expense?Depreciation is an accounting method that spreads out the cost of an asset over its useful life. Depreciation expense is the cost of an asset that has been depreciated for a single period, and shows how much of the asset's value has been used up in that year.
What is depreciation and amortization examples?The example of assets where depreciation can be used is the plant, building, machine, equipment etc. The example of intangible assets which are amortized are patents, trademarks, lease rental agreements, concession rights, brand value etc.
|