Share Loading the player
This is the currently selected item. Video transcript You'll often hear the words depreciation and amortization used together.
And what I want to do in this video is to understand a little bit better why they are similar and the slight difference between the two. So in our previous examples, we've done depreciation. And so this is right at the end of period zero or at the beginning of period one.
And what we do is we spread out this expense over the period of time that we're actually going to use the truck. We're assuming we have a three year life of this truck.
And we're just going to do what's called straight line depreciation. We're just going to take the cost of the truck and divide it by its life.
There's other ways to depreciate it. Maybe you Depreciation vs depletion imagine that it depreciates faster in the first year, but this is the simplest type.
And it's actually used by a lot of companies, just straight line depreciation.
We expense it in that year. So this is literally an expense. Now on our books at the end of period two, it'll be worth And then on, at least for just this truck, assuming we haven't bought a new one yet, we've completely written it off.
It is now worth zero on our books because based on what we assumed, it's not useful anymore. We kind of have to scrap this truck. Now imagine if to run our trucking business we also have to pay some type of license fee. So let me call this a license fee. And we get to use it over four years.
You're not just using the fee in that period. That fee is going to be useful over the next four years. So once again, you would put down the asset, the paid license fee or maybe the prepaid license fee depending on how you view it.
And then you would amortize that cost, which is essentially the same thing mathematically. Now I've completely written it off and I probably have to get another license at this point. So mathematically, they're the same thing.
Even philosophically, they're the same thing. The idea that instead of expensing these expenses all at once you're saying, look, they have some useful life. Let me spread out the expense over their useful life.
The difference between the two-- and you might have already kind of realized this-- is depreciation is when you have hard assets. If you have a building or a truck or some type of equipment, you would depreciate that asset.
If you have a non-hard asset or a financial asset or something that's less tangible, then you would just amortize it. This is just kind of a different word depending on how tangible the asset is. So if it's a license fee or some other type of fee or some type of it maybe intellectual property, you would amortize the cost.
If you have a truck or a building or whatever, you would depreciate it.It is important to note that the term amortization refers to intangible assets; the term depreciation refers to tangible assets, and the term depletion refers to natural resources. Popular Now. 1. What is a Small-Cap Stock? 2.
Profiting from Options. 3. The Advantage of Tax-Advantaged Funds. 4. The property's basis for depletion. The total recoverable units of mineral in the property's natural deposit.
The number of units of mineral sold during the tax year. Accounting Education is a not-for-profit educational organization created by Prof. Vinod Kumar for helping you in accounting, finance and education. Depreciation vs Depletion Depreciation and Depletion both have similar accounting concepts but are used for different asset / company types.
Both are used to . MinE Exploration and Valuation Depreciation and Depletion Pre-feasibility Studies often are completed prior to having all the information needed or engineering completed. Depreciation and Depletion are Non-Cash deductions from income for tax calculations.
For instance, coal, sand, and gravel holdings are all subject to depletion rather than depreciation or amortization. Depletion is handled by a method similar to units of production If you have property that may need to be depleted or amortized, ask your accountant for details.