How are depreciation and amortization similar or different?

Answer 1

What I've had explained to me is that Depreciation is the value of the house (etc) with time starts to fall. Amortization is the gradual elimination of a debt in regular payments over a period of time.

For more on amortization and depreciation go to:

Answer 2

In contrast to some of the items listed above, depreciation and amortization, from an accounting perspective, are terms that describe an allocation of cost over the useful life of an item. A business buys a building that will last 30 years, they depreciate the business for 30 year, or in other words, allocate the cost of the purchase over the 30 year that the building will be used. It has NOTHING to do with a decrease in value over time.

To answer your specific question, tangible assets (buildings, cars, equipment, boats, etc) are depreciated, whereas intangible assets (goodwill, intellectual property) are amortized. The concept is exactly the same.

Answer 3

Depreciation and amortization are both non-cash items. So, when you create a profit and loss statement, you are allowed to deduct these expenses before taxes, but then pull them back out when calculating your cash flows.

Depreciation is a common expense of any business with assets. Amortization is much less common, only showing up on the financial sheets of some of the larger public companies with regular R&D programs that amortize their investments over the life of a project. Maybe amortization is used at other times, but I haven't seen it personally. (When discussion depreciation and amortization together, we're usually talking about profit and loss statements, not amortizing a loan. This second kind of amortization is only used for breaking out interest expenses from principle expenses, pulling the interest out of the P&L in the interest account, and the principle from the liability balances on the balance sheet).

Good luck

Answer 4

An amortized loan is for one specific amount that is to be paid off by a certain date, usually in equal monthly installments. Your car loan and home loan fit that definition. Your credit card account doesn't because it's a revolving loan with no fixed payoff date.


Depreciation is the process by which a company allocates an asset's cost over the duration of its useful life. Each time a company prepares its financial statements, it records a depreciation expense to allocate a portion of the cost of the buildings, machines or equipment it has purchased to the current fiscal year. The purpose of recording depreciation as an expense is to spread the initial price of the asset over its useful life. For intangible assets - such as brands and intellectual property - this process of allocating costs over time is called amortization. For natural resources - such as minerals, timber and oil reserves - it's called depletion.

Hope this helps.

Answer 5

Depreciation usually refers to the value of something going down. You can depreciate the value of your rental property over 27 years.

Amortization is a calculation that shows how interest is applied to principal over the life of the loan. A home mortgage has the interest on the front end - the amoritzation schedule will show how much of your payment each month goes toward principal and interest.

Answer 6

Depreciation is the devaluation of an item over time. Usually a car or a computer are the fastest "depreciating" items.

Amortization is the length of time that a debt will be paid off. Usually when you are re-financing a loan, you are "reamortizing" it; meaning you are changing the length of time that you will pay it off.