Depreciation vs. Amortization: What’s the Difference?
The main difference between depreciation and amortization is that depreciation applies to tangible assets whereas amortization applies to intangible assets.
Before we move to more differences, let’s first understand Depreciation and Amortization:
- Depreciation: Depreciation is an accounting process by which the cost of tangible assets is gradually written off over a specific period, reflecting the wear and tear and eventual decline in the value of the asset.
- Amortization: Amortization is the process by which the cost of intangible assets is gradually written off over a period, reflecting the asset’s finite useful life in generating revenue.
Now, let’s get to Depreciation vs Amortization:
Major differences between Depreciation and Amortization
| Depreciation | Amortization |
|---|---|
| Depreciation is related to property, plant and equipment. | Amortization usually relates to intangible assets such as patents, copyrights, and trademarks. |
| Depreciation has multiple methods of calculation, such as straight-line, declining balance, and sum-of-the-years-digits methods. | Amortization is mainly calculated using the straight-line method. |
| Depreciation can be influenced by depreciation limits set by tax laws. | Amortization often involves calculating the carrying value of intangible assets. |
| Depreciation is commonly used in manufacturing and other industries with heavy asset investments. | Amortization is usually adopted in service and technology industries, where intangible assets are more prevalent. |
| The impact of Depreciation can be seen in the balance sheet and income statement. | The impact of Amortization only appears on the income statement. |
So, these are the main differences between the entities.
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