If you’ve ever read a company’s financial report or calculated EBITDA, you’ve probably seen the words depreciation and amortization. They may sound similar, but they apply to different types of business assets.
Let’s break it down in a simple way. 😄
Table of Contents
🙋 What Do They Have in Common?
Both depreciation and amortization are ways to:
- Spread out the cost of an asset over time
- Reflect the gradual use or “wear and tear” of assets
- Lower accounting profits (but not cash flow)
- Get added back when calculating EBITDA
Now let’s look at what makes them different 👇
🛠️ Depreciation
Used for: Tangible assets (physical things)
That means things you can touch — like:
- Buildings
- Equipment
- Vehicles
- Machinery
- Furniture
📌 Example:
You buy a truck for $30,000 and expect to use it for 5 years. You depreciate it at $6,000 per year.
🧾 It shows up on your income statement as an expense, even though you didn’t spend new money each year.
💻 Amortization
Used for: Intangible assets (non-physical things)
These include:
- Software licenses
- Patents
- Trademarks
- Copyrights
- Goodwill
📌 Example:
You purchase a 5-year software license for $10,000. You amortize it at $2,000 per year.
🧾 It also reduces accounting profit but doesn’t affect your bank account directly.
🔀 Key Differences at a Glance
| Feature | Depreciation | Amortization |
|---|---|---|
| Applies to | Tangible assets | Intangible assets |
| Examples | Vehicles, machinery | Patents, software licenses |
| Value over time | Often has resale value | Often no resale value |
| Common methods | Straight-line, declining | Usually straight-line only |
| Shown as expense? | ✅ Yes | ✅ Yes |
| Cash flow impact? | ❌ No | ❌ No |
🎯 Why It Matters
Knowing the difference helps you:
- Better understand financial statements
- Know what affects cash vs accounting numbers
- Be smarter with business budgeting