Accounting Manager Interview Question:

What is the difference between depreciation and amortization?

Submitted by: Muhammad

Capital expenses are either depreciated or amortized based upon the type of asset.

Depreciation
☛ Depreciate means to lose value of an asset due to their usage, wear and tear, outdated, etc.
☛ Depreciation cost is calculated in terms of tangible assets like furniture, plant & machinery, building, etc.
☛ The purpose of calculating depreciation costs recovery
☛ The easiest way to calculate depreciation is to know the loss of value of an asset over its life.
☛ For example, a car worth $30,000 has estimated the lifetime of 10 years after that it will have no value in the market. The cost or loss in value throughout this 10 years is known as depreciation
☛ Various method for depreciation includes straight line depreciation, declining balance method, group depreciation method, unit of time/production depreciation method, etc.

Amortization
☛ Amortize means to write off or pay the debt over a period of time. Amortization can be for loans, or it can be for Intangible assets
☛ Amortization cost is calculated in terms of intangible assets like goodwill, trademark, loans, patents, etc.
☛ The purpose of calculating amortization is also for cost recovery
☛ Amortization calculates the amount spent after the intangible assets throughout the life for that asset
☛ For example, Pharmaceutical Company spent $20 million dollars on a drug patent with a useful life of 20 years. The amortization value for that company will be $1 million each year
☛ Various method for amortization is negative amortization, zoning amortization, business amortization, etc.
Submitted by: Muhammad