What is the difference between depreciation and amortization

The concepts of depreciation and amortization have much in common and are associated with the depreciation of production assets. Meanwhile, they are not identical and should be distinguished from each other.

The concept of depreciation and amortization

A significant proportion of the company's costs are associated with the cost of capital resources (equipment, premises). Their peculiarity lies in the fact that they are not spent on a single production cycle, like raw materials, but serve for years. But at the same time they are subject to wear.

Depreciation is the process of an object losing its characteristics, resulting in a decrease in its value and depreciation. This may apply to such fixed assets of the enterprise as equipment, buildings, vehicles, etc.

In an economic sense, physical and moral wear are distinguished. Physical depreciation is associated with depreciation of property when it loses its properties as a result of aging when using this property. It is calculated as the ratio of the life of the asset to the standard life of the asset. Depreciation occurs as a result of partial loss of value by fixed assets as a result of the emergence of new, more advanced technologies or under the influence of other factors.

Depreciation is the process of partially transferring the value of fixed assets as they become depreciated to the cost of production. It is carried out using depreciation rates.

There is a so-called fixed asset circuit. It includes three stages: depreciation, amortization and compensation. Depreciation and amortization are carried out in the process of using fixed assets in production, reimbursement is carried out during their creation and restoration.