What is the difference between Depreciation and Amortization?

Amortization is the process of closing the loan on schedule payments on regular installments, and also the process to reduce the value of intangible assets on regular installments.

 

But the depreciation is the process to reduce the value of fixed assets on regular installments.

In acvounting,same thing interms of systematic allocation of cost over asset life - armotisation normally used for intangible assets, while depreciation is used for tangible assets. However when it comes to valuation of assets, depreciation refers to consumption of economic benefits over time/ used life or value. Loss of value over time.

Depreciation is the term used with reduction in the value of tangible fixed assets like plant, machinery, furniture etc. whereas amortization is the term used with reduction in the value of intangible assets like copyrights, patents etc.

Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally expensed based on the time period over which the asset was used. Both depreciation and amortization (as well as depletion) are methods that are used to prorate the cost of a specific type of asset to the asset's life. It is important to mention that these methods are calculated by subtracting the asset's salvage value from its original cost.

 

Amortization usually refers to spreading an intangible asset's cost over that asset's useful life. For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company's income statement.

 

 

Depreciation, on the other hand, refers to prorating a tangible asset's cost over that asset's life. For example, an office building can be used for a number of years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year.

Amortization for intangible assets like patent copyright etc. While depreciation charges for tangible assets such PP& E..