Depreciation vs. amortization

Depreciation is an annual income tax deduction that enables you to gradually recoup the purchase price or other basis of a particular item of property over the course of its usage. It is a provision for the property's normal wear and tear, degeneration, or obsolescence. Most categories of tangible property, including structures, machines, cars, furniture, and equipment, are eligible for depreciation (with the exception of land). Additional intangible property that can be depreciated includes software, copyrights, and patents.

Definition of Amortization

Amortization is a technique for recuperating (deducting) some capital expenses over a predetermined time frame. It is comparable to the straight-line depreciation approach. The list below includes all of the different amortisable charges discussed in this chapter. However, the amortisation of bond premium is not covered in this chapter.

Differences betweeen amortization and depreciation

Depreciation:

• Only applies to tangible assets.
• Decreases the value of an asset philosophically.
• There are several options from which a firm might pick, which could lead to rapid, irregular quantities being reported each year.
• When computing depreciation base, salvage value may be taken into account.
• Always employs counterassets.

Amortization:

• Only pertains to intangible assets.
• Philosophically, only the straight-line technique is often used to spread the expense of an item.
• The same quantity is frequently recorded each year.
• Does not take salvage value into account when calculating amortisation basis.
• Possibly not always employ opposing assets.

Author: Sonia María Soriano Marín

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