depreciation and amortization…..?

2 Comment(s)

1. Terms typically used in business to describe the value of an asset, which can be a physical property as example. A machine that costs $100,000 to purchase does not have the same value a year later after its been used for a year. The value of the asset cannot be recorded as $100,000 because it is no longer worth that. It depreciates, or loses value (in this case due to use), over time. When taxes are based upon the value of the assets a company holds, this is essential.

   Amortization is the repayment of a debt over time, it literally means “to bring to death” the debt or loan. There are specific amortization schedules for loans, such as a mortgage or your car payment.

   basehit | Feb 18, 2010 | Reply

2. Sorry I disagree with the previous answer but I cannot rate as I am not of sufficient level.

   In summary, depreciation and amortisation both refer to the spreading out of a transaction over multiple periods. There are two perspectives on this- accounting and tax.

   Under accounting, depreciation is the identification of the useful life and appropriate method of depreciation (straight line or declining balance) so that an asset which loses value over time (e.g. a computer) is appropriately accounted for as it’s value declines. For example, a computer may have a useful life of 3 years (either as determined by a rule/law/standard or your own best estimate/judgement) before it is worthless and hence if you paid $1500 for it, each year, you should deduct $500 to reflect the reduction in it’s value until it reaches nil.

   From a tax perspective, depreciation is used to spread out the cost of purchasing an asset used to generate revenues over multiple periods in accordance with ‘matching principle’ whereby income and expenses which are related should be recognised in the same period and offset. This is pretty much the same as the accounting method above but tax laws can stipulate useful lives and this is more dependent on government policy.

   Amortisation in the accounting context is typically used to describe depreciation of an intangible asset such as software or goodwill. These are usually items which have a very difficult to determine or estimate useful life.

   Also note, amortisation in a non-accounting-specific context can be used to describe a loan payment schedule over multiple periods.

   JaCe | Feb 20, 2010 | Reply

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