What is the difference between depreciation and amortization

Concepts of depreciation and amortization have a lot in common and are associated with the depreciation of production assets. Meanwhile, they are not identical and they should be distinguished from each other.

The concept of depreciation and amortization

A significant proportion of company costs associated with the cost of major resources (equipment, premises). Their peculiarity is that they are not consumed in one production cycle as raw materials, and last for years. But at the same time are subject to wear.

Wear is a process of loss of the object, its characteristics, resulting in the lowering of cost and depreciation. These could be fixed assets like equipment, buildings, vehicles, etc.

In economic terms, there are physical and moral deterioration. Physical deterioration is associated with the wear of the asset with the loss of its properties due to aging during the use of this property. It is calculated as the ratio of the time of operation of the asset to the regulatory deadline. Obsolescence occurs as a result of partial loss of the asset of its value by newer more advanced technologies or under the influence of other factors.

Depreciation is a process of partial transfer of the assets as depreciation on the cost of production. It is carried out with the use of depreciation deductions.

There are so-called the circuit of fixed assets. It includes three stages: depreciation, amortization and compensation. Depreciation and amortization are carried out in the process of using fixed assets in production, compensation - as they are created and recovering.

Comparison of depreciation and impairment

Based on the comparison of the concepts of depreciation and impairment are the following differences:

- at the time of occurrence of the amortization accrued as a result of depreciation, i.e. it is its consequence;

depreciation is the monetary equivalent of depreciation of fixed assets, whereas depreciation has no cash value;

- depreciation does not necessarily depend on the level of wear on the object can be fully depreciated value, not subjected to full wear and tear and subject to future use; happen the reverse situation - when the equipment fails before complete write-off its cost;

- the company can independently determine the depreciation rate;

- in accounting, the term depreciation is not used, only the depreciation; depreciation - concept of financial analysis;

the term depreciation is enshrined in law, whereas the legal definition of wear is absent;

- wear and tear – decrease in value of fixed assets and the rate of equipment obsolescence and depreciation – transfer to the cost of production, which allows to restore the Fund's fixed assets.