Depreciation vs Amortization: What's the Difference?
Short answer. Both spread the cost of an asset over the years it helps earn revenue. Depreciation applies to tangible assets such as buildings, vehicles and equipment. Amortization applies to intangible assets such as patents, software and licences, and also to paying down a loan. Neither is a cash expense in the year it is recorded.
Side by side
| Depreciation | Amortization | |
|---|---|---|
| Applies to | Tangible assets | Intangible assets (and loan principal) |
| Examples | Machinery, vehicles, buildings | Patents, trademarks, capitalised software |
| Common methods | Straight-line, declining balance, units of production | Almost always straight-line |
| Salvage value | Often estimated | Usually zero |
| Land | Not depreciated | Not relevant |
| Effect on profit | Reduces reported earnings | Reduces reported earnings |
| Cash effect | Non-cash; may lower taxes | Non-cash; may lower taxes |
Which one fits you?
Lean towards Depreciation if…
- you account for physical equipment or property
Lean towards Amortization if…
- you account for patents, licences or capitalised software
- you describe loan repayment schedules
Frequently asked questions
Is goodwill amortised?
Under US GAAP public companies test goodwill for impairment rather than amortise it; some jurisdictions allow amortisation.
Why are both added back in EBITDA?
They are non-cash charges, so EBITDA removes them to show operating profit before capital-cost allocation.
What is accelerated depreciation?
A method that records more depreciation in early years, such as double-declining balance, lowering taxable income sooner.
General education, not personal financial advice. Figures are typical US examples and vary by provider and year.