Depreciation and Amortization
The gradual decline in the value of an asset due to wear and tear, age, or obsolescence etc. is called depreciation. The concept of depreciation comes into play as most tangible assets have limited useful life. It distributes the cost of an asset across time periods when the asset is employed to generate revenues. Typically, depreciation expense is calculated by either a straight line depreciation method or an accelerated depreciation method. The straight line method calculates depreciation by distributing the cost evenly over the useful life of the fixed asset. On the other hand, Accelerated depreciation methods such as declining balance and sum of years digits calculate depreciation by expensing a large part of the cost at the beginning of the life of the fixed asset.
Amortization is the practice of writing off the capital expense especially the expense on intangible assets over a particular period of time. It should not be confused with depreciation as depreciation is with regard to tangible assets only. Amortization also refers to the process of paying off debt over a period of time through regular payments. The payment usually has two components. One portion of each payment is for interest while the remaining amount is applied towards the principal balance.