Depreciation vs. Amortisation: What's the Difference?
UK small business owners may be familiar with the term "depreciation," but not "amortisation." Both depreciation and amortization are accounting methods used to spread the cost of an asset over its useful life. The main difference between the two is that depreciation is used for physical assets, while amortisation is used for intangible assets.
What is Amortisation? Amortisation is an accounting method used to spread the cost of an intangible asset over its useful life. Intangible assets are non-physical assets such as patents, copyrights, and goodwill. Amortization ensures that the cost of an intangible asset is recognized in a systematic and rational manner over its useful life.
How does Amortization work? The amount of an intangible asset's cost that is recognized as an expense each period is calculated by dividing the asset's cost by its estimated useful life. For example, if a patent has a cost of £100 and an estimated useful life of 10 years, £10 of the patent's cost would be recognized as an expense each year for 10 years.
What are some examples of intangible assets that are commonly amortized? Intangible assets that are commonly amortized include patents, copyrights, trademarks, and goodwill.
What is Depreciation? Depreciation is an accounting method used to spread the cost of a physical asset over its useful life. Physical assets are Tangible assets such as land, buildings, machinery, vehicles, and equipment. Depreciation ensures that the cost of a physical asset is recognised in a systematic and rational manner over its useful life.
How does Depreciation work? The amount of a physical asset's cost that is recognised as an expense each period is calculated by dividing the asset's cost by its estimated useful life. For example, if a building has a cost of £1,000 and an estimated useful life of 10 years, £100 of the building's cost would be recognised as an expense each year for 10 years.
Though both depreciation and amortisation are ways to spread the costs of an asset over time, they are two different methods used for two different types of assets. Depreciation applies to physical assets while amortization applies to intangible assets such as goodwill or copyrights. If you're unsure which method to use for your business, talk to your accountant for more guidance.
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Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.
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