Difference between Depreciation and amortisation?
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Answer Posted / prakash
Because very few assets last forever, one of the main
principles of accrual accounting requires that an asset's
cost be proportionally expensed based on the time period
over which the asset was used. Both depreciation and
amortization (as well as depletion) are methods that are
used to prorate the cost of a specific type of asset to the
asset's life. It is important to mention that these methods
are calculated by subtracting the asset's salvage value
from its original cost.
Amortization usually refers to spreading an intangible
asset's cost over that asset's useful life. For example, a
patent on a piece of medical equipment usually has a life
of 17 years. The cost involved with creating the medical
equipment is spread out over the life of the patent, with
each portion being recorded as an expense on the company's
income statement.
Depreciation, on the other hand, refers to prorating a
tangible asset's cost over that asset's life. For example,
an office building can be used for a number of years before
it becomes run down and is sold. The cost of the building
is spread out over the predicted life of the building, with
a portion of the cost being expensed each accounting year.
Depletion refers to the allocation of the cost of natural
resources over time. For example, an oil well has a finite
life before all of the oil is pumped out. Therefore, the
oil well's setup costs are spread out over the predicted
life of the oil well.
It is important to note that in some places, such as
Canada, the terms amortization and depreciation are often
to used interchangeably to refer to both tangible and
intangible assets.
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