Amortization and depreciation are two completely different concepts. Experts in the field have given their definitions of the two. The A-Z of finances is different for experts and laymen and hence, it is difficult to understand the difference between depreciation & amortization.
It is an established fact that no asset is going to last you a lifetime. Thus, one has to calculate the cost of the asset based on its usability. The factors that come into consideration when looking at cost of different types of assets over a period of time are:
In order to calculate correctly, one will have to understand terms such as depreciation and amortization.
Amortization is when one calculates the cost of an intangible asset in proportion with its lifetime. Thus, if an asset is going to be of use for another 10 years, then one will calculate the maintenance cost of the asset spanning over 10 years and accordingly the total value of the asset. Thus, one will have to take a look at the inflow and outflow of cash in order to calculate the profit and the loss over the asset.
Depreciation is when one calculates the cost of a tangible asset in proportion to the possible life of the asset. For instance, if an asset’s possible lifetime is about 15-20 years, then the cost incurred and profits gained can be calculated over those years. A small portion of the cost is accounted for each year. Usually, reasons such as efflux of time and obsolescence of technology can be attributed to depreciation.
However, one does not leave depletion out of the picture in both the cases because the cost of various materials depletes overtime such as that of electronics or of real estate. Thus, these things have to be taken into consideration while calculating.
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