Depreciation and Amortization

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Anil (Querist)
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21 March 2008 Recently I came across the acronym - EBITDA which stands for "earnings before interest, taxes, depreciation and amortization"

The dictionary meaning of Amortization is - "The reduction of the value of an asset by prorating its cost over a period of years"

I would like to know how 'amortization' is different from 'Depreciation'as the above definition also holds good for depreciation.

kartik_somu

kartik_somu (Expert)
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21 March 2008 Both depreciation and amortization (as well as depletion) are methods that are used to prorate the cost of a specific type of asset to the asset's life. It is important to mention that these methods are calculated by subtracting the asset's salvage value from its original cost.

Amortization usually refers to spreading an intangible asset's cost over that asset's useful life. For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company's income statement.

Depreciation, on the other hand, refers to prorating a tangible asset's cost over that asset's life. For example, an office building can be used for a number of years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year.

Anil

Anil (Querist)
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21 March 2008 Doubt cleared. Thank you very much sir.

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