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Let me know please in detail that what is the difference between Depreciation & Amortization.
From India , Gurgaon
Hi Sunil let me attempt to give you a quick idea of the difference between Depreciation and Amortization. Although these two words are often used interchangably but there is a basic difference. Both the terms relate to "expensing" or "reducing" the book value of an asset over the useful economic life of the asset. As you know most assets have a finite economic life. After that life is over the asset ceases to be productive and only has a "salvage" value - which could be the price the kabari wala is willing to pay for it :) ! On a more serious note, the economic life (in years) is in most cases laid down by the Company Law for different classes of assets. Companies reduce the original value of the asset by a certain amount each year. This amount is treated as an expense in the income statement (P&L account) and correspondingly the asset value is reduced by the same in the Balance Sheet.

This principle remains the same irrespective of the type of asset. For tangible assets such as plant and machinery, furniture and fixtures etc. this expense is called "depreciation". For intangible assets such as product patents, brand value, goodwill, business start up or pre-operating expenses such as consulting fees, license fees etc. the expense is called "amortization".

There is also a third term that is not as common which is called "depletion". This pertains to assets such as mines, oil and gas fields or any other natural resource that has a finite and limited economic life. Each year as the natural resource is exploited the value of the resource (asset) is reduced or depleted by a corresponding amount.

As mentioned in all the above the basic principle of "charging" / "reducing" / "expensing" the value of the asset over its economic life (useful life) is the same. Whether the asset is a tangible asset (depreication) or an intangible one (amortization) determines the terminology used.

I mentioned "goodwill" as an example of intangible assets. In many countries including the US, the accounting laws have been modified wherein goodwill is no longer amortized. Instead the goodwill is tested annually for "impairment" and the value is reduced in case it is found that the goodwill has indeed been impaired during the year.

I hope the explanation above has been useful to you. If you further queries feel free to contact me at

From India , Delhi
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