Depreciation vs. Amortization

Both depreciation and amortization are methods that are used to adjust the current value of the asset in terms of its use.

Depreciation is an expense indicating the loss of value of an asset as regards its sale or use. It is the size of the positive difference between the accounting value of an asset and its recoverable value.

If the recoverable value is lower than the accounting value than the asset is depreciated. If the recoverable value is higher than the accounting value, the asset is appreciated. The finding of depreciation is made both for amortizable assets and for nonamortizable ones. In case of amortizable findings, depreciation leads to the decrease of the amortization basis for the future financial years.

Amortization is the value of the fixed assets which degraded over time. Amortization appears as a value equivalent to the irreversible deterioration of an asset following its operation, the action of natural factors, technical progress or other causes.

Amortization is a very complex process which influences technical, accounting, economic, financial, legal and tax issues. It relates to distribution in the expenses of the amortizable amount of an asset throughout its entire lifespan.

From the financial point of view, the role of amortization is to recover the invested capital, a source to finance the asset. The accumulation of the yearly amortizations must allow the replacement of the asset which cannot or must not be used.

From the accounting point of view, amortization is an expense which indicates the consumption, respectively the use of the asset.

So in summary.

Both deprecation and amortizations are assets value adjustments,which are recorded, evaluated and registered in the loss and profit account. They differ in terms of reason of the assets re-evaluation and types of assets which are subject of re-evaluation.