Depreciation vs Amortisation – Guide

What is Depreciation?

Depreciation is the process of allocating the cost of a tangible asset over its useful life. This method is used for physical assets like machinery, vehicles, and buildings.

What is Amortization?

Amortisation applies to intangible assets, gradually reducing their value over a specific period, such as patents, copyrights, and trademarks.

Key Differences Between Depreciation and Amortisation

The primary difference between depreciation vs amortisation lies in the types of assets they apply to—tangible versus intangible.

How Depreciation Affects Financial Statements

Depreciation appears as an expense, reducing net income and asset value.

How Amortisation Affects Financial Statements

Similarly, amortisation affects the income statement by gradually lowering asset values.

Common Methods of Depreciation

Various methods like straight-line, double-declining, and units-of-production are used for calculating depreciation.

Methods of Amortisation

The straight-line method is most commonly used in amortisation calculations for simplicity.

When to Use Depreciation vs Amortisation

Businesses use depreciation for tangible assets and amortisation for intangibles, aligning with accounting standards.

Implications of Depreciation and Amortisation on Taxes

Both depreciation vs amortisation impact taxes by reducing taxable income through expense deductions.

Future Trends in Asset Management

With advancing technology, asset management tools streamline depreciation vs amortisation calculations for better accuracy.