Difference between Depreciation and Amortization

Depreciation and Amortisation are two different concepts used in accounting to calculate the value of an asset. Depreciation is a method to reduce the value of fixed assets due to wear & tear whereas amortisation is dividing the cost of an asset over the number of years of its life. Depreciation and Amortisation both are used in calculating the value of intangible assets but follow a different approach. 

What is Depreciation?

Depreciation is a method for calculating the loss in the value of a long-term fixed tangible asset owing to usage, wear, and tear, age, or changes in market conditions. Long-term fixed tangible assets are assets that the firm has owned for more than three years that can be seen and touched. Depreciation is charged as a capital expenditure against the revenue earned by the asset over the year.

To calculate depreciation, the cost of the asset is considered, from which the salvage value is subtracted and the amount gained is then divided by the estimated number of life years using the Straight Line Method of Depreciation. Every year, the money acquired is charged as an expense in the Profit & Loss Account and subtracted from the value of an asset in the Balance Sheet. The value obtained when the asset is resold at the end of its life is referred to as the salvage value.

What is Amortisation?

Amortisation is a way of quantifying the loss by distributing the value of long-term fixed intangible assets over the number of years of their life in order to determine their decreasing worth. Long-term fixed intangible assets are assets owned by a business for more than three years but do not exist in material form, such as computer software, licenses, franchises, and so on. Similarly to depreciation, the amount of amortisation is reflected as a reduction in the intangible asset on the assets side of the Balance Sheet.

A variety of amortisation methods are given including Straight Line, Reducing Balance, Bullet, and so on. The cost of the asset decreases by the residual value, which is then divided by the number of years it is expected to last, the amount obtained is the amount of amortisation.

Difference between Depreciation and Amortisation

Basis	Depreciation	Amortisation
Meaning	Depreciation is a process used to calculate the decline in the value of an asset due to age, wear and tear or any other technological factor.	Amortisation is dividing the cost of an asset over the number of years of its life
Accounting Standard	Accounting Standard 6 is applicable on depreciation.	Accounting Standard 26 is applicable on amortisation.
Applicability	It’s applicable on tangible assets like machinery, vehicle, computers, etc.	It’s applicable on non-current Intangible assets like copyright, patent, goodwill, etc.
Objective	To capitalise the cost of an asset over its useful life.	To distribute the asset’s cost throughout its life years.
Methods	Some of the methods to calculate depreciation are Straight Line, Reducing Balance, Annuity, Sum of years digit, etc.	Some of the methods to calculate amortisation are Straight Line, Reducing Balance, Annuity, Increasing Balance, Bullet, etc.
Salvage value	A depreciated physical asset may have salvage or scrap value.	There is no salvage or scrap value for an amortised intangible asset.