Amortization vs. Depreciation
So what do they both mean in practice?Amortization and depreciation refer to the concepts that most assets have a useful life and over time their value will go down.
So each year a company holds an asset it needs to reduce the value of that asset and recognize it as an expense, this expense being the amortization or depreciation expense. So if an asset has five years of use before its worthless each year 20% of the value will be expensed to the income statement, and the value on the balance sheet will decline by 20% also.
Amortization for AcademicsIn a technical, but not business practice, perspective amortization is applied to intangible assets. Intangible assets are patents or goodwill (from acquiring another business) and are not actual physical assets held by a company. A patent can be worth millions of dollars, but you don't have anything more than a piece of paper to really show the value. As such these assets are considered intangible. Intangible assets often still have a useful life, say a patent that is valid for 10 years, and the value of the patent will be expensed evenly over that time period
Depreciation for AcademicsFrom a technical perspective depreciation is the same concept but applied to tangible assets. Tangible assets are physical assets, i.e. buildings, cars, machinery, that have a set useful life after which they are no longer of value or would need to be replaced. A company would recognize a depreciation expense related to the decline in value of these assets over the years until the assets effective life is done.
Amortization vs. DepreciationAs said above amortization and depreciation are more academic concepts as opposed to what's really done in real life. Large publicly listed companies that only have tangible assets will still have an amortization expense on their income statement. For use in business anyone can feel free to use the two words interchangeably.
By Jeffrey Glen
Posted in ...Business