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Sujai Adithya
Business Development and Banking & Financial Services Expert
Asked a question last year

What are the differences between amortization and depreciation?

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Sujai Adithya
Business Development and Banking & Financial Services Expert

The meaning of both of this is to reduce value of the assets over a period of time, either by recovering or Written off. But, both of this are very different to one other and the main difference is the use of this method while reducing the value of an asset.

INTRODUCTIONAmortization is a one type of cost recovering technique used for intangible assets.Same as amortization, this one is used for the tangible assets over a period of time.
MEANINGTo Amortize means to write off cost or pay debtTo Depreciate means to loss the value
DEFINITIONAmortization is a method used to write off cost over a period of time on the Intangible assets.Depreciation means to recover the loss of money on the tangible assets. 
AIMTo capitalize value over a fixed period of timeTo allocate amount over a period of time.
APPLY ON WHICH ASSETSIntangible assets i.e. Patent , copyright, goodwill, trademark, royalty etc.Tangible Assets i.e. land and building , machinery, etc.
ACCOUNTING STANDARDIt uses Accounting standard 26It uses Accounting Standard 6
 CALCULATION METHODStraight line method, reducing balance method, Annuity increasing balance method , Increasing balance method, Bullet method etc.Straight line method, Down value method.
 BALANCE SHEET EFFECTIt directly affects the balance sheet by reducing assets.It indirectly affects balance sheet by cumulative depreciation amount.
SALVAGE VALUEIn amortization method, there is no salvage value because the life of intangible asset has expired.In Depreciation method, at the end of the period there is a possibility of salvage value. This will add to the depreciation.

Amortization is a method of spreading the cost of an intangible asset over a specific period of time, which is usually the course of its useful life. Intangible assets are non-physical assets that are nonetheless essential to a company, such as patents, trademarks, and copyrights. The goal in amortizing an asset is to match the expense of acquiring it with the revenue it generates.

Like amortization, depreciation is a method of spreading the cost of an asset over a specified period of time, typically the asset's useful life. The purpose of depreciation is to match the expense of obtaining an asset to the income it helps a company earn. Depreciation is used for tangible assets, which are physical assets such as manufacturing equipment, business vehicles, and computers. Depreciation is a measure of how much of an asset's value has been used up at a given point in time.