Value of any asset – tangible or intangible (meaning explained further) decreases with time and it gives less benefit thereafter. The two terms associated with this decrease in value of assets are Amortization and Depreciation.
Both can be used synonymous with a little difference between them as described below:
Amortization
- It is the routine decrease in the value of intangible assets.
- Intangible assets are the one which are not physical or cannot be touched like trademarks, copyrights, goodwill, software, agreements, license, etc.
- Amortization can also be said as the process of paying off one’s debts through regular payments.
- Example: If insurance premium is Rs 12,000 annually, u will be paying Rs 1000 per month.
Depreciation
- It is the routine decrease in the value of tangible assets due to wear and tear or due to use of asset.
- Tangible assets are the one which are physical or can be touched like building, furniture, equipment, vehicles, etc.
- Example: An office building can be used for many years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed in each accounting year.
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