Corporate accountants use a variety of techniques to save companies money, including depreciation and amortization. Both depletion and amortization constitute methods of accumulating tax write-offs for items that a company owns for the duration of their useful life span. At first glance, these terms may even appear to mean the same thing, though one key aspect differentiates depletion from amortization.
Depreciation is a means of writing off the loss of value for an asset over the course of its lifetime for tax purposes. This method of writing off lost cost applies to all tangible assets owned by a company. Tangible assets constitute anything of value that assumes physical form, from a building to a vehicle, computer, desk or piece of manufacturing equipment. When an asset has a finite life span, it loses value each year between its purchase and the point at which it no longer provides any value. Companies can calculate this value and write it off as a loss for tax purposes.
Amortization is a way for businesses to write off the loss of value of an asset over the course of its lifetime for tax purposes. This method of writing off lost cost applies to all intangible assets owned by a company. Intangible assets constitute anything of value with no physical form, including copyrights, patents, trademarks, brands, franchises and goodwill. All of these intangible assets lose value over time -- companies write this lost value off through amortization. Some intangible assets, such as Internet domain names, possess indefinite life spans. A company cannot amortize an asset without finite value.
Depreciation vs. Amortization
Conceptually, depreciation and amortization prove identical. Companies use both of these methods as a means of writing off lost value on assets with finite life spans on their tax statements. In practice, amortization only applies to intangible assets, while depreciation only applies to tangible assets. Because these methods apply to different types of assets, which posses different types of value and lose value at different rates, accountants use different formulae when calculating deprecation and amortization.
Amortization and depreciation comprise two parts of a triumvirate. Depletion, the third part of this triumvirate, also constitutes a means of calculating lost value on assets over time for tax purposes. This method of writing off lost cost applies only to natural assets. For instance, if a company purchases land for logging, this land loses all value when the company completely deforests it. The same holds true for natural resources like oil and gas.
- Accounting Coach; Depreciation Expense; Harry Averkamp
- “U.S. Master Tax Guide”; 2008; CCH Incorporated
- Principles of Accounting; Chapter 11; Larry Walther; 2010
- “JK Lasser's Small Business Taxes 2010”; Barbara Weltman; 2010