Replying to @nothappeningtoday1 in intro accounting class depreciation and amortization are important and very similar concepts! Here I break down the main differences that can provide an easy study guide when preparing for quizzes and exams. #accounting #study #explained #journalentry #depreciation #amortization

What are the differences and similarities between depreciation and amortization? I'm an accounting professor, I got this question, so let's talk about it. It's not surprising that a lot of students confuse depreciation and amortization because they're extremely related and similar concepts. Both depreciation and amortization are cost allocation concepts, meaning we're taking the cost of an asset and we're spreading that cost over its useful life, recognizing it as expenses, to match it with the periods in which that asset will help us to generate revenue. This helps us to satisfy our expense matching principle. Now where they differ is the types of assets that they each deal with, how we calculate the amount, and the journal entries that we use to recognize them. Depreciation deals with tangible assets, meaning assets we can go out and touch, things like equipment and buildings. Whereas amortization deals with intangible assets. These are things that have no physical substance, things like patents, trademarks, copyrights, etc. Each of these even has one thing that we never depreciate or amortize. In the case of depreciation, we never depreciate land because we assume that it has an indefinite life. And with amortization, we never amortize goodwill because we assume that it has an indefinite life. When comparing calculations, straight line depreciation is calculated as acquisition cost minus salvage or residual value, divided by the useful life of the asset. Amortization is very similar except we don't have a salvage or residual value for intangible assets. Once their useful life is complete, they cease to exist. So think about the fact if we owned a patent, as soon as that patent is up, we no longer have protections over producing that type of product. And finally, as far as our journal entries go, with depreciation, we always use a contra account, meaning we'll book depreciation expense by debiting depreciation expense and crediting accumulated depreciation, which is a contra asset found on our balance sheet. In the case of amortization, we can use a contra account or we can just use the intangible asset itself. What I mean is that we'll debit amortization expense and we can either credit the intangible asset itself, like a patent, or we can credit accumulated amortization. Either method is acceptable and will get you to the same place as far as reporting the value of that intangible asset on our balance sheet. So I hope this helps. Thank you so much for the question. I really appreciate it. Follow for more. Drop any questions you have in the comments and repost to share the knowledge with someone who could use it.