Accounting

Depreciation and Amortization are methods used to spread the cost of an asset to the life of the asset. This principle is known as accrual accounting.

Depreciation is a non-cash expense. It is an expense which is used to account for the assets (tangible) cost over its useful life.

In accounting, depreciation matches the expense accounted for an asset with the income that the company earns using the asset. For example, ifa company purchases equipmentfor 1mn with a life of 10 years, then the term for depreciation is 10years. For each accounting year, the company will expense 100,000(assuming straight-line depreciation). This expense ismatched with the money which the equipment earns every year. There are several methods to calculate depreciation which the companies use. The most common methods are the Straight-line method and Accelerated method.

Amortization is about writing off expense on assets (intangible) such as patents, goodwill, copyrights etc. over their useful economic lives. This representation reflects the consumptiondecline of value as a result of its use with passage of time. The reduction in the value of the intangible asset in the balance sheet is treated as an expense in the income statement. For e.g. a patent on a drug has a life for 20 years. This means that the cost for creating the drug is spread out over the life of the drug as an expense in the income statement. Even amortization can be calculated using straight-line and diminishing balance methods.