The difference between amortization and depreciation
/What is Amortization?
Amortization is the process of incrementally charging the cost of an intangible asset to expense over its expected period of use, which shifts the asset from the balance sheet to the income statement. It essentially reflects the consumption of an intangible asset over its useful life. Examples of intangible assets that may be charged to expense through amortization are broadcast rights, patents, and copyrights.
What is Depreciation?
Depreciation is a planned, gradual reduction in the recorded value of a tangible asset over its useful life by charging it to expense. Depreciation is applied to fixed assets, which generally experience a loss in their utility over multiple years. Examples of tangible assets that may be charged to expense through depreciation are furniture, equipment, and vehicles.
Comparing Amortization and Depreciation
The key difference between amortization and depreciation is that amortization charges off the cost of an intangible asset, while depreciation does so for a tangible asset.
Another difference between the two concepts is that amortization is almost always conducted on a straight-line basis, so that the same amount of amortization is charged to expense in every reporting period. Conversely, it is more common for depreciation expense to be recognized on an accelerated basis, so that more depreciation is recognized during earlier reporting periods than later reporting periods.
Yet another difference between amortization and depreciation is that the calculation of amortization does not usually incorporate any salvage value, since an intangible asset is not typically considered to have any resale value once its useful life has expired. Conversely, a tangible asset may have some salvage value, so this amount is more likely to be included in a depreciation calculation.
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Similarities Between Amortization and Depreciation
The two concepts also share several similar traits. For example, both depreciation and amortization are non-cash expenses - that is, the company does not suffer a cash reduction when these expenses are recorded. Also, both depreciation and amortization are treated as reductions from fixed assets in the balance sheet, and may even be aggregated together for reporting purposes. Further, both tangible and intangible assets are subject to impairment, which means that their carrying amounts can be written down. If so, the remaining depreciation or amortization charges will decline, since there is a smaller remaining balance to offset.
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