Difference Between Depreciation and Amortization
One of the main principles of accrual accounting is that an asset’s cost is proportionally expensed based on the period over which it is used. Both depreciation and amortization (as well as depletion) are methods that are used to prorate the cost of a specific type of asset over its useful life. Main points of difference between depreciation and amortization are as follows.
1. The reduction in value of a tangible asset due to normal usage, wear and tear, new technology or unfavorable market conditions is called depreciation. Assets such as plant and machinery, buildings, vehicles etc. which are expected to last more than one year, but not for infinite number of years are subject to depreciation.
2. It only applies to tangible assets.
3. Straight line, Diminishing value, etc. are few of the various methods to charge depreciation.
4. Journal entry for depreciation
*without using accumulated depreciation account
5. Example of Depreciation
Machinery cost = 10,000, Depreciation Rate = 20%
Depreciation charge (1st year) = 2,000
1. The process of of spreading the cost of an intangible asset such as patent, copyright, trademark etc. over a specific period i.e. equal to the course of its useful life is called Amortization.
2. It only applies to intangible assets.
3. Only Straight line method is used for amortization of intangible assets.
4. Journal entry for amortization
*without using accumulated amortization account
5. Example of Amortization
Patent cost = 10,000, Useful life of patent = 10 years
Amortization rate/year = 10%
1st year = 10/100*10,000
Amortization expense (1st year) = 1,000
Above mentioned are major points of difference between depreciation and amortization along with their respective examples.