Understanding Accounting Terms — What is Depreciation and Amortization 

If you are running your business, you must understand that having an accurate record of your investments, expenses, and assets is crucial. However, you must understand that two terms are highly used in managing your assets: Depreciation and Amortization. These two concepts are very necessary for every accountant to comprehend to make sure that all the accounting reports are meticulous. 

Therefore, depreciation is a concept where the accountant has to deal with the loss of value in your assets, and amortization refers to the decrease in the value of assets over some time.

Understanding depreciation and its methods.

When it comes to depreciation, you must understand that it refers to expensing the fixed assets over their useful lives. These assets are tangible and are acquired by the business by leveling the costs and expenses by the revenue of the assets.

Methods of depreciation – 

• Straight-line depreciation.

Straight-line depreciation is one of the easiest methods to define depreciation since all it requires is calculating the exact amount of the assets and dividing them equally over their useful lives. For example, if the cost of the assets is $12000 and their useful lives are six years, then the depreciation for one year will be $2000. 

• Declining balance depreciation.

Declining balance depreciation is another method of depreciation where the depreciable assets are accelerated. It is determined by evaluating the costs of the assets in the beginning years so that it can help in paying for the type of assets that lose their value quickly. Common examples of such assets are computers and vehicles. 

• Units of production depreciation.

This method of depreciation depends on the asset’s usage, asset activity, or on the produced parts. These assets consist mainly of types of equipment for the business that depend on the wear and tear of the production.

Understanding Amortization and its Methods 

Amortization is another term in which the value of intangible assets is processed over their useful lives. These assets usually consist of non-physical assets like copyrights, goodwill, and trademarks.

Methods of Amortization – 

• Straight-line Amortization.

Straight-line amortization is the same method as straight-line depreciation. In this method, the expense of all the intangible assets is calculated and divided evenly over their useful lives. For example, if the cost of the intangible assets is $22000 over the useful life of 11 years, then the cost of the assets per annum will be $2000.

• Amortization is based on revenue.

This amortization method is not used by every businessman, but some of them use this method to amortize the value of assets based on the revenue since this ensures a closer match between the given expense and revenue.

If you want to understand more about depreciation and amortization, consider seeking professional guidance from your accountant.