Many people use amortization and depreciation interchangeably thinking that they both mean the same thing, however they both are different and here are some of the differences between the two –
1. Depreciation can be defined as the reduction in the value of an asset due to usage, passage of time, wear and tear, technologically outdated or obsolescence and other such factors, while amortization is defined as spreading of cost of the asset over the useful life of the asset.
2. Example of depreciation is that suppose the value of the asset is $10000 and rate of depreciation is 20 percent then depreciation will be $2000. While in case of amortization suppose the company has purchased the patent of $10000 for a period of 10 years than the every year $1000 will be amortized.
3. Depreciation is used for tangible assets like building, furniture, plant and machinery while amortization is used for intangible assets like patents, goodwill, trademarks etc…
Hence from the above it can seen that though both depreciation and amortization are use to allocate the cost of the asset over its useful life, however they differ in terms of their calculations as well as nature of the asset and hence they should be used accordingly.