How to Read a Depreciation and Amortization Report

Depreciation and amortisation both meant to reduce the value of the asset yr past year, but they are not one and the same thing. The deviation between the 2 must exist appreciated. Writing off tangible assets for the period is termed as depreciation, whereas the procedure of writing off intangible stock-still assets is amortization.

Fixed avails refers to the avails, whose benefit is enjoyed for more than than ane accounting flow. Stock-still assets tin be tangible fixed assets or intangible stock-still assets. The value of fixed nugget tends to decrease over time. Equally per matching concept, the portion of asset employed for creating acquirement, needs to exist recovered during the financial year, so as to friction match the expenses for the menses. And for this purpose, depreciation and amortization is practical, on the stock-still assets.

Then, take a read of the article given below, which describes the difference between depreciation and amortization in detail.

Content: Depreciation Vs Amortization

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

Footing for Comparison	Depreciation	Acquittal
Significant	Depreciation is a technique used measure out the decrease in the value of the asset due to historic period, wear and tear or any other technical reason.	Amortization is a method of allocating the depreciable amount over the life of the intangible stock-still asset.
Governing Accounting Standard	AS - vi for Depreciation	Every bit - 26 for Intangible Assets
Applies on	Non-current Tangible Asset like mechanism, vehicle, computers etc.	Non-current Intangible Asset similar copyright, patent, goodwill etc.
Purpose	To prorate the cost of the asset over its life years.	To capitalize the cost of the asset over its life years.
Methods	Direct Line, Reducing Balance, Annuity, Sum of years digit, etc.	Straight Line, Reducing Balance, Annuity, Increasing Remainder, Bullet etc.
Type of Expense	Non-Cash	Non-Cash

Definition of Depreciation

A technique used to make up one's mind the loss in the value of the long-term fixed tangible asset due to usage, clothing and tear, age or change in market conditions is known every bit depreciation. Long term fixed tangible assets mean the assets which are owned past the visitor for more than than three years, and they can be seen & touched. The depreciation is charged equally a uppercase expenditure against the revenue generated from the nugget during the year i.east. matching concept.

For the purpose of calculating the depreciation, the cost of the asset is taken into consideration, from which the salvage value is deducted, and and so the amount obtained is divided by the estimated number of life years as per Straight Line Method of Depreciation. Now, the corporeality obtained is charged every bit an expense every year in the Profit & Loss Business relationship and simultaneously deducted from the value of an asset in the Residual Canvas. Salvage Value ways the value obtained when the nugget is resold at the end of its lifetime.

There are 2 very popular methods of depreciation, i.e. Straight Line Method and Written Down Value Method (Reducing Rest Method). An organization may opt any method of depreciation, merely it should be applied consistently in every financial year. If an organization wants to change the method of depreciation, then the retrospective effect is to be given. Any surplus or deficit arising on business relationship of such change in the method of depreciation shall be debited or credited to the profit & loss account as the case may be.

Definition of Amortization

Amortization is a method of measuring the loss in the value of long-term stock-still intangible assets due to the passage of fourth dimension, to know nigh their decreased worth is known as amortization. Long term fixed intangible assets are the avails which are endemic by the entity for more than 3 years, merely they do not exist in its material course like computer software, license, franchises, etc. Similarly, like depreciation, the amount of acquittal is also shown on the assets side of the Balance Canvas equally a reduction in the intangible asset.

Diverse methods of amortization are given like Straight Line, Reducing Balance, Bullet, etc. The toll of the nugget is reduced by the residual value, then it is divided by the number of its expected life, the amount obtained volition be the corporeality of amortization, this is a Straight line method.

There are cases when the acquittal is charged in a lump sum, i.e. in the year in which the intangible asset is acquired, which is incorrect, as the benefit from that asset volition be received over a long time so it should be apportioned on the life of the nugget, this method is known equally Bullet Method. Sometimes the pattern for charging amortization is besides given in which the corporeality is charged every year on a proportionate basis.

Acquittal is non charged equally an expense on the assets which are internally generated or on the avails which have space life years.

Key Differences Between Depreciation and Amortization

The major differences between depreciation and amortization are every bit under:

1. A technique used to summate the reduced value of the tangible assets is known as Depreciation. Amortization is a mensurate to calculate the reduced worth of the intangible assets.
2. Depreciation applies to tangible assets i.east. the avails which exist in physical course like plant and machinery, vehicle, computer, furniture, etc. Conversely, Amortization applies on intangible assets i.eastward. the avails which exist in their non-concrete form similar royalty, copyright, computer software, import quotas, etc.
3. The chief objective of depreciation is to allocate the cost of assets over its expected useful life. Dissimilar amortization, which focuses on capitalizing the amount of the price of an asset over its useful life.
4. Methods for calculating depreciation are Straight Line, Reducing Balance, Annuity, etc. On the other hand, the method for calculating amortization are Straight Line, Reducing Rest, Annuity, Bullet, etc.

Determination

Depreciation and Amortization are typically identical terms the only difference is that depreciation applies to tangibles while acquittal applies to intangibles. Both are not-monetary capital expenditure and hence shown in the assets side of the Balance Sail equally a reduction in the value of the asset concerned. Withal, these two terms are governed past different accounting standard

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