AMORTIZATION Vs. DEPRECIATION
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Transcript of video
Hi, my name is Mandesa and welcome to TransLegal's lesson of the week.
Today I'm going to be talking about the distinction or difference between amortization and depreciation.
Both amortization and depreciation are methods that companies use to allocate the costs of an asset over time. However, depreciation refers only to tangible assets. For example, cars, equipment, machinery; whereas amortization refers to intangible assets, for example, licences or patents.
So for example, if a company were to buy a piece of machinery that is expected to have a life of 10 years and that machinery cost $10 million, assuming a straight line method of depreciation, then this machine would be depreciated by $1 million under 10 years. However, if the same company were to purchase a licence to use equipment for 10 years at a cost of $10 million, the value of this licence would be amortized at $1 million a year under 10 years.
Thank you very much. If you have any questions or comments please feel free to write them in the little box below and either myself or one of my colleagues will be happy to get in touch with you. Thank you very much.