Difference Between Amortization and Depreciation

At the end of every financial year, it is essential to calculate the company's asset value for the
essential annual reports and tax purposes. There are two ways to calculate this value;
depreciation and amortization. So, when a company buys an asset such as real estate or other
assets, the difference between the two methods should be understood. Amortization is the
method that is used to decrease the cost of the asset over time, while depreciation is the loss in
value of the asset over time. This understanding helps in better understanding the financial
implications of the purchase and saving time, effort, and money. The two calculations are
important to calculate the tax liabilities and deductions over the asset's life.

Meaning of amortization
We often think of a company's assets as the real estate, plants, machinery, and equipment that
is acquired by it. However, an asset can also be intangible such as customer lists, trade names,
copyrights, patents, trademarks, franchisees, proprietary assets, bonds issued to raise capital,
and employee relations or human capital. These intangible assets add significant value to a
company. However, they can also lose value over time, and this loss in value is recorded on the
financial statements through amortization.
The amortization value is usually calculated through the straight-line depreciation method,
which means that the value that is recorded remains the same throughout the assets' useful
life. This straight-line method of calculation is also used in accounting. Intangible assets, unlike
tangible ones, do not have any salvage or resale values at the end of their usable life.
Amortization also deals with the change in the value of intangible investments related to capital
investments.

Meaning of depreciation
Depreciation is a term used to expense the gradual decrease in value of a physical asset
throughout its useful life. These tangible or fixed assets include real estate property, buildings,
plants, machinery, equipment, vehicles, furniture, and other tangible items that the company
owns.
The value of an item when it is brand new and after a period of use, sees a gradual reduction
based on the period it has been used for. Tangible assets also have a residual value after the end
of their useful life. The difference between this residual value and the cost of the asset is the
depreciation. It is accounted for as a tax credit by the business through the asset’s useful life
period.
An example could be a piece of machinery bought by a company. It is used for many years until
it wears out beyond the point of repair or becomes obsolete. It may then be sold for scrap
value. The loss of value that the machinery suffers through the years is depreciation. If the asset
is a vehicle, the depreciation value is calculated at an accelerated speed at the beginning of the
period as it loses most of its value in the first few years.