What Is Amortization and Depreciation?

Amortization and deprecation are two different methods of handling an asset deduction when you are using accrual accounting for your business. Amortization is used for intangible expenses, while deprecation is used for tangible expenses. Accrual accounting does not deduct an asset immediately when you buy it. The cost of assets are spread over the functional lifetime of the asset itself to provide a more complete view of a business' cash flow and profit.

Amortization

Amortization is the deduction method used for intangible products that don't have a specific lifetime of usefulness. An example of a business expense that is an intangible expense is a patent or trademark for one of your products. The length of time that the intangible asset can be spread over is based on the estimated useful lifetime of the asset. This information is included on the company's cash flow statement.

Depreciation

Depreciation is comparable to amortization, but it is used for tangible expenses that have a definite lifetime. The cost of the tangible asset is spread for the entirety of its useful life, so that the upfront costs of the asset can be spread throughout its life. Depreciation comes in several different types, such as straight-line depreciation and activity depreciation. Straight-line depreciation spreads the cost of the asset evenly throughout its life, while activity depreciation adjusts the deduction based on how often the asset is actually in use.

Accrual Accounting

Both amortization and depreciation are used in accrual accounting, an accounting method used by businesses that do not want to use cash accounting, or do not qualify to use the cash accounting method. Accrual accounting tracks income and expenses as each transaction is made. Unlike cash accounting, accrual accounting does not wait until the money is taken out or paid.

Filing

Both amortization and depreciation use the same Internal Revenue Service tax form to be properly claimed on taxes. This form is Form 4562 and it covers many different potential deduction situations. This form covers varying years of depreciation, special depreciation cases, vehicle depreciation and asset amortization. All deductions must be included on this form to be counted for your tax liability deductions.