Difference between depreciation and amortisation?

Question: What is the Difference Between Depreciation and Amortization?

The concepts of depreciation and amortization are confusing to business people who don't work with them every day, but it's important to know about these terms and how they can work to help you minimize your tax bill.

Answer:

First, Some Background on Cost Recovery

The concept of depreciation/amortization is a tax method designed to spread out the cost of a business asset, what the IRS calls "cost recovery.".

If you buy copy paper for your business, you expect its useful life is months, not years. So copy paper can be counted as an expense in the year it is purchased.

But if you buy office furniture or a piece of equipment, you expect to use it for several years, so the IRS says you must "recover" the cost by taking it as an expense over several years, considered as the "useful life" of that assets. So, if you buy a $1000 desk for your office, the IRS has a specific amount of time you can spread out that cost, not counting any salvage (leftover) value. If the salvage value is $100, and the useful life is 9 years, you can take $100 a year as an expense. This calculation is over-simplified, but you get the idea.

What is Depreciation?

Depreciation is method of recovering the cost of a tangible asset over its useful life. The desk I mentioned above, for example, is depreciated, as is a company vehicle, a piece of manufacturing equipment, shelving, etc. Anything that you can see and touch and that lasts longer than a year is considered a depreciable asset (with some exceptions, of course).

What is Amortization?

Amortization is the same process as depreciation, only for intangible assets - those items that have value, but that you can't touch. For example, a patent or trademark has value, as does goodwill. To add to the confusion, amortization also has a meaning in paying off a debt, like a mortgage, but in the current context it has to do with business assets.

The IRS has designated certain intangible assets as eligible for amortization over 15 years, according to Section 197 of the Internal Revenue Code.

So, the basic rule-of-thumb is that you depreciate tangible assets and amortizeintangible assets.

컨셉과 정의를 떠나 쉽게 말하자면 한마디로 둘 다 감가상각이지만 Depreciation 은 실질적 PPE 를 위한 감가상각, Amortisation 는 추상적인 intangible asset 을 위한 감가상각임.