Depreciation and amortization are two accounting methods used by public companies to account for the value of assets over time. Both methods are used to spread out the cost of an asset over its lifetime, but there are some key differences between the two.
Depreciation is an accounting method that is used to spread out the cost of a tangible asset over its useful life. The cost of the asset is spread out over its life, reducing the company’s taxable income in the present and creating a tax benefit for the company. Depreciation is a non-cash expense, meaning that it does not require payment out of the company’s coffers.
Amortization, on the other hand, is an accounting method used to spread out the cost of an intangible asset over its useful life. Intangible assets are not physical items, such as patents and copyrights, and they are not subject to the same taxes as tangible assets. Amortization is a cash expense, meaning that the company must pay out of its coffers in order to spread out the cost of the asset over its life.
The main difference between depreciation and amortization is that depreciation is a non-cash expense and amortization is a cash expense.
Depreciation does not require payment out of the company’s coffers, but amortization does. Additionally, depreciation is used to spread out the cost of tangible assets, while amortization is used to spread out the cost of intangible assets.
Both depreciation and amortization are important accounting methods used by public companies to spread out the cost of assets over time. Understanding the difference between the two methods can help a company make informed decisions about how to manage its finances and maximize its tax benefits.