Amortization vs. Depreciation

Amortization vs. Depreciation

When a company purchases an asset, it is not recorded using its full cost. Depending on the type of asset, it will be recorded as either an amortized or depreciated asset. This accounting method spreads the cost of the asset over the life of the asset, with the company reporting a portion of the expense each year.

Depreciation is used with assets that are tangible, such as equipment and buildings. Depreciation counts on the value of the asset declining over a period of time. For example, a piece of construction equipment will be less valuable when it is 10 years old than it is when it is brand new. The only asset that is not depreciated is land, as it does not lose value over time.

Amortization is used with assets that are intangible, such as patents and trademarks. If a company purchases a patent, and there are 10 years remaining, those years would be amortized over the remaining life of the patent. However, certain intangible assets are not amortized, such as brand names, as their lives are considered indefinite.

When assets are depreciated, the depreciated annual expense is larger at the beginning of the assets life, and lowers each year thereafter. For example, when you purchase a car, it immediately depreciates once it is driven off of the dealer's lot. When assets are amortized, the annual expense is the same throughout the life of the asset.

In addition, with amortized assets no final value is considered. For example, once a patent expires, it has no value. With depreciated assets, an asset can still have resale value once its useful life has expired. For example, a piece of construction equipment depreciated over 10 years could still have value once it's depreciated life concludes. This resale value is often included in the calculation of its depreciation.

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