As a business owner or manager, you have probably heard the terms depreciation and amortization mentioned in relation to expensing your company’s assets on income statements. Unless you spend your free time studying up on accounting principles and techniques, these terms were more than likely unfamiliar to you, or even confusing. Don’t worry, the accounting professionals at Geddes & Company, P.C. are here to help. Below we’ve included a little bit of information about how these concepts differ, and how they are the same.
Depreciation refers to tangible assets. It is an accounting practice in which the initial cost/value of a tangible asset, such as an office building, industrial machinery, or company vehicle, is prorated over an estimated span of the assets useful life. This allows a business to write-off a large, tangible, business expense over the course of multiple years, rather than all in the year the purchase was made. In order to determine the total value of the asset that will depreciate, you must subtract the asset’s salvage value (the potential resale value of the asset at the end of its useful life) from the assets original purchase value. A depreciation schedule determines the amount of the total depreciation that will occur annually. Unlike amortization where the amount is generally the same every year, depreciation schedules tend to be front loaded, with large amounts in the early years, gradually decreasing over time.
Amortization is similar to depreciation, however, it only refers to intangible assets. An intangible asset can be something like a business trademark or patent. For amortization schedules, the same amount will be applied every year. Hypothetically, if your business has worked to develop a patentable technology, the cost associated with developing that technology and securing the patent could all be amortized over the life of the patent.
If you have any questions about the appropriate methodology of apply depreciation/amortization to your business assets, Geddes & Company, P.C. is here to help. We can help you make assumptions about the useful life of your assets and aid you in preparing income statements for your business. Contact us by phone or online today to find out more about the accounting services Geddes & Company can offer your business.