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Depreciation and Amortization - Explained

The document explains depreciation and amortization. Depreciation is the decrease in value of tangible assets like cars and machinery over their useful life. Amortization is similar but applies to intangible assets like patents and trademarks. Both allow businesses to deduct the cost of assets over multiple years rather than all at once.

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64 views9 pages

Depreciation and Amortization - Explained

The document explains depreciation and amortization. Depreciation is the decrease in value of tangible assets like cars and machinery over their useful life. Amortization is similar but applies to intangible assets like patents and trademarks. Both allow businesses to deduct the cost of assets over multiple years rather than all at once.

Uploaded by

CJ dangi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Mohan Rajpurohit

Depreciation and Amortization


(in simple terms)
Mohan Rajpurohit

Imagine that your father bought a new car for Rs.


5,00,000. This car is an asset that your family owns, and
it will be useful for several years.

However, as time goes by, the car will become older,


and its value will decrease. This decrease in value over
time is called depreciation.
Mohan Rajpurohit

Now, your father cannot simply deduct the entire Rs.


5,00,000 from his income in the year he bought the car.

That would be unfair because the car will be used for


many years.

Instead, he will spread out the cost of the car over its
expected useful life, which could be, let's say, 8 years.
Mohan Rajpurohit

So, each year, your father will deduct a portion of the


car's cost from his income.

This portion is calculated by dividing the total cost of


the car (Rs. 5,00,000) by its useful life (8 years).

Depreciation = Rs. 5,00,000 (Cost) = Rs. 62,500


per year
8 years (Useful life)

This process of gradually deducting the cost of an asset over


its useful life is called depreciation. It applies to tangible
assets like cars, machinery, buildings, and furniture.
Mohan Rajpurohit

Now, let's talk about amortization.

Amortization is similar to depreciation, but it applies to


intangible assets.

These are assets that you cannot physically touch, like


patents, trademarks, or copyrights.
Mohan Rajpurohit

For example, let's say your uncle's company developed a


new software program and obtained a patent for it.

The cost of obtaining the patent was Rs. 2,00,000, and


the patent is valid for 10 years.
Mohan Rajpurohit

Just as we did it for car, for patent amortization value is


calculated by dividing the total cost of the patent (Rs.
2,00,000) by its useful life (10 years).

Amortization = Rs. 2,00,000 (Cost) = Rs. 20,000


Value per year
10 years (Useful life)

This process of gradually deducting the cost of an intangible


asset over its useful life is called amortization.
Mohan Rajpurohit

✓ Tangible Assets Depreciation

✓ Intangible Assets Amortization

Both are accounting practices that help businesses


spread out the costs of their assets over time, rather than
deducting the entire cost in one year.

This helps them match their expenses with the revenue


generated from those assets, giving a more accurate
picture of their financial performance.
This was depreciation and amortization: The ultimate
Showdown

Keep up for more such content.

Mohan Rajpurohit

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