Depreciation and Amortization are the two ways to calculate the assets value of the company. Assets value is calculated at the end of the financial year for the tax purpose. Every company has its assets which may be tangible and intangible. Depreciation is used to calculate the reduction in the cost and value of tangible assets like land, machinery and other physical assets or things. Amortization is the way to calculate the reduction in the cost and the value of the non-tangible assets like license of software and patents etc.
It is very important to calculate Cost and value reduction of the assets for the tax purpose because it leads to the reduction in the tax value. So, it’s very important to understand the concept of depreciation and Amortization. In this article we will discuss in detail about the Depreciation and Amortization. Many terms are related to depreciation and Amortization. All terms and aspects we will discuss here.
Depreciation vs Amortization
| Sr. No | Depreciation | Amortization |
| 1 | Technique which is used to calculate the reduction in value and cost of the tangible assets. | The technique which is used to calculate the reduction in value and cost of the intangible assets. |
| 2 | Applicable only on tangible assets | Is applicable on intangible assets.
|
| 3 | There is salvage value | No salvage value |
| 4 | Used to calculate the cost of the assets for its useful life | Is used to capitalize the cost of intangible assets for the useful life period. |
Depreciation
Depreciation is a way to calculate the cost and the value reduction of the tangible assets which take place due to the passage of time. The decrease in the value may occur due to the wear and tear and age of the asset. Depreciation applies on tangible assets only like physical assets and machinery, vehicles and buildings. Main purpose of this technique is just to find the depreciation value of the asset.
This is calculated by the difference methods like straight line reducing balance, sum of years digits, annuity. When Depreciation is calculated, total purchase value of the asset and salvage value is calculated and deducted after that this value is divided by the estimated life years of the machinery and assets. This calculation is the example of a straight-line method. This value is added and deducted from the profit and loss of the financial years.
Example
Annual depreciation = (cost of tangible assets – salvage value)/ useful life
Total cost of asset = 15000$
Residual value 10 % after 5years so = 15000 x 10 % = 1500$
So we have = (15000 – 1500)5 = 13500/5
= 2700$
Amortization
It is the technique which is used to measure the loss in the value and cost of the intangible assets due to passage of time. Intangible assets are the assets which are not physically available to the company for computer software, patents and franchise. The amount of the amortization is also shown in the assets side of the balance sheet with the not reduction in the intangible assets.
Amortization value is calculated by the many methods some methods are Reduction balance, bullet, straight line etc. To calculate Amortization, the total value of the asset is divided by the expected years of the asset. This is the calculation of the straight-line method.
Example
Annual amortization = (cost of asset)/useful life
Cost of intangible assets 10000$
Useful life 10 years
So annual amortization = 10000/10
= 1000 $
Main difference between the depreciation and Amortization
- Depreciation is the technique which is used to calculate the reduction in value and cost of the tangible assets. Amortization is the technique which is used to calculate the reduction in value and cost of the intangible assets.
- Depreciation is applicable only on tangible assets. While amortization is applicable on intangible assets.
- In depreciation there is salvage value. But no salvage value in the amortization.
- Depreciation is used to calculate the cost of the assets for its useful life. While amortization is used to capitalize the cost of intangible assets for the useful life period.
Conclusion
Both depreciation and Amortization are the indicator terms which have only difference is that one is applicable on intangible assets while other is applicable on tangible assets. Both are shown on the assets side in the balance sheet. Both are very important to calculate the decreasing asset value which are very important for the tax. Reduction in value also leads to the reduction of the tax payment.
This is all about the depreciation and Amortization. Hope this article will be helpful for you. If you have any doubt please feel free to comment on us. For more interesting topics like this please go through our website.
Depreciation
Depreciation is a way to calculate the cost and the value reduction of the tangible assets which take place due to the passage of time.
Amortization
It is the technique which is used to measure the loss in the value and cost of the intangible assets due to passage of time.
Main difference between the depreciation and Amortization
Depreciation is applicable only on tangible assets. While amortization is applicable on intangible assets.
In depreciation there is salvage value. But no salvage value in the amortization