Amortization vs Depreciation: What’s the Difference?

Amortization and depreciation are two accounting methods that help businesses spread the cost of an asset over its useful life. These two accounting methods sound almost identical, but they handle completely different types of assets. Depreciation is used for physical assets you can touch—think equipment, vehicles, and machinery. Amortization does the same job for intangible assets like patents, trademarks, and copyrights. Both help you spread the cost of an asset over its useful life instead of taking a massive expense hit all at once.

In this guide, we’ll explain the difference between amortization and depreciation, show examples, and help you understand which method applies to your business.

What Is Amortization vs Depreciation?

The definition of amortization vs depreciation comes down to one fundamental difference: the type of asset involved. 

• Depreciation applies to tangible assets you can physically touch.
• Amortization applies to intangible assets without physical form.

This distinction matters for your small business bookkeeping and tax reporting because matching expenses with the revenue they generate creates more accurate financial statements. Your income statement won’t reflect true business performance if you expense an entire asset cost upfront.

Why Amortization vs Depreciation Accounting Matters

Understanding whether an asset should be amortized vs depreciated directly impacts your financial reporting accuracy. Using the wrong method creates errors on your balance sheet and can cause tax complications.

What Is Depreciation?

Depreciation allocates the cost of tangible assets—physical things you can touch—over their useful lives. These assets lose value through use, wear and tear, and obsolescence.

Common depreciable assets include buildings, vehicles, machinery, office equipment, computers, and tools. 

Land is the big exception. It usually isn’t depreciated because it doesn’t wear out or become obsolete in the same way.

Common Methods to Calculate Depreciation

Most small businesses use a few standard methods to calculate depreciation:

Most small businesses use straight-line depreciation for its simplicity. For detailed calculations, see our guide on how to calculate depreciation.

Depreciation Schedule Example

Imagine you own a landscaping company and buy a commercial mower for $15,000. You expect it to last 5 years with a $3,000 salvage value.

Annual Depreciation (Straight-Line)
= (Cost – Salvage Value) ÷ Useful Life
= ($15,000 – $3,000) ÷ 5
= $2,400 per year

Each year, you record $2,400 in depreciation expense. A depreciation schedule helps you track this systematically over the mower’s life, reducing the mower’s book value while recording the expense on your profit and loss statement.

What Is Amortization?

Amortization spreads the cost of intangible assets—things without physical form but with economic value—over their useful lives. The amortization of an intangible asset follows a simple, consistent schedule to record the expense over time.

Common amortized assets include patents, trademarks, copyrights, licenses, and franchise agreements. Unlike depreciation, intangible assets don’t physically wear out. Their value declines because legal protection expires or they become outdated.

According to the legal definition of amortization, costs are usually spread over the asset’s useful life or a period defined by tax rules.

Straight-Line Amortization Method

Amortization almost always uses the straight-line method. You divide the asset’s cost by its useful life and record equal expenses each period.

Formula: Cost ÷ Useful Life

There’s typically no salvage value for intangible assets. A patent worth $100,000 with a 20-year life gets amortized at $5,000 per year.

Loan Amortization vs Asset Amortization

The term “amortization” has two common meanings:

1. Asset amortization – Spreads the cost of an intangible asset over time for financial reporting.
2. Loan amortization – Pays off debt through regular payments that include both principal and interest.

When someone mentions a loan amortization table, they’re talking about a debt repayment schedule, not an asset expense. It’s important not to confuse loan amortization with amortization of an intangible asset on your books.

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Depreciation vs Amortization: Key Differences

Understanding the difference between depreciation and amortization helps you apply the correct accounting method. When deciding whether to amortize vs depreciate an asset, consider these factors.

Asset Type: Tangible vs Intangible

This is the most fundamental difference:

• Depreciation = Tangible Assets (equipment, vehicles, buildings)
• Amortization = Intangible Assets (patents, copyrights, trademarks)

Do you amortize or depreciate equipment? You always depreciate equipment because it’s tangible. Whether something gets amortized vs depreciated depends entirely on whether you can physically touch it.

Calculation Methods and Flexibility

The depreciation vs amortization difference extends to calculation flexibility. Depreciation offers multiple methods—straight-line, declining balance, or units of production. Amortization almost always uses straight-line calculation because intangible assets typically don’t have accelerated value loss patterns.

Amortization Expense vs Depreciation Expense on Financial Statements

Both amortization expense and depreciation expense appear on your income statement and reduce net income. On your balance sheet, both use contra-asset accounts:

• Accumulated Depreciation tracks total depreciation for tangible assets
• Accumulated Amortization tracks total amortization for intangible assets

These accumulated accounts reduce the asset’s book value over time while keeping the original cost visible. Maintaining an accurate chart of accounts helps you track these entries properly.

Tax Differences

According to IRS Topic 704, depreciation follows specific schedules based on asset class. A delivery van might depreciate over 5 years, while a commercial building depreciates over 39 years.

Amortization of intangible assets must follow the asset’s legal life or 15 years, whichever is shorter, according to IRS Section 197. Some tax rules allow accelerated depreciation through Section 179, which generally don’t apply to amortization. These differences affect your tax deductions for contractors and business owners.

How Depletion is Related to These Concepts

The difference between depreciation, depletion, and amortization is worth noting. Depletion applies to natural resources like timber, oil, and minerals. While depreciation handles physical assets and amortization handles intangible assets, depletion specifically addresses extracting natural resources.

Amortization vs Depreciation Examples

Real examples clarify when to use each method and show the amortization vs depreciation difference in practice.

Tangible Asset Depreciation Example

Carlos owns a construction company and purchases an excavator for $80,000 with a 10-year useful life and $10,000 resale value.

Annual Depreciation = ($80,000 – $10,000) ÷ 10 = $7,000

Each year, Carlos records this journal entry:

• Debit: Depreciation Expense $7,000
• Credit: Accumulated Depreciation $7,000

Intangible Asset Amortization Example

John obtained a patent costing $50,000. Patents last 20 years.

Annual Amortization = $50,000 ÷ 20 = $2,500

Each year, John records:

• Debit: Amortization Expense $2,500
• Credit: Accumulated Amortization $2,500

Understanding proper journal entry accounting helps ensure accurate financial records.

Accumulated Depreciation vs Accumulated Amortization

Both accumulated depreciation and accumulated amortization are contra-asset accounts with credit balances that reduce related asset accounts. The accumulated amortization vs accumulated depreciation comparison shows they function identically but apply to different asset types.

How D&A Appear on Your Balance Sheet

Property and Equipment:

• Equipment: $80,000
• Less: Accumulated Depreciation: ($35,000)
• Net Equipment: $45,000

Intangible Assets:

• Patents: $50,000
• Less: Accumulated Amortization: ($12,500)
• Net Patents: $37,500

Understanding your assets and liabilities helps you maintain accurate financial records.

Why These Methods Matter for Small Businesses

Understanding these accounting concepts provides practical benefits that impact your bottom line.

Tax Savings Through Non-Cash Expenses

Both methods create non-cash expenses that reduce taxable income. The consequence of not properly accounting for depreciation and amortization is paying more taxes than necessary.

Accurate Profitability Reporting

If you expensed a $100,000 machine entirely in year one, your income statement would look terrible even if your business is healthy. These methods spread costs over time to show true profitability.

Better Business Decision Making

Knowing the book value of your assets helps when considering upgrades or replacements. This becomes important when you calculate cash flow or prepare your annual report.

Strengthening Loan Applications

Lenders examine your financial statements closely. Proper depreciation and amortization demonstrate financial sophistication, especially when you’re writing a business plan.

Legal Compliance and Audit Protection

Following proper accounting methods keeps you compliant with GAAP and tax regulations. If you don’t maintain accurate records, you risk penalties during audits.

Understanding Impairment

Impairment occurs when an asset’s market value drops below its book value due to damage, obsolescence, or market changes. When this happens, you must write down the asset to fair value immediately rather than waiting for normal depreciation or amortization.

Managing Your Depreciation and Amortization

Use accounting software or work with a professional to ensure accurate calculations. Review your chart of accounts regularly to verify proper categorization of assets and their related expenses.

When preparing your profit and loss statement, ensure depreciation expense and amortization expense are properly recorded. These entries affect your tax returns and reported profitability. For businesses calculating retained earnings, remember these methods reduce net income even though they don’t involve cash outflows.

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Final Thoughts on D&A

The meaning of amortization vs depreciation is straightforward: depreciation applies to tangible assets, while amortization applies to intangible assets. Both methods spread asset costs over time to match expenses with the revenue those assets generate.

For small business owners, getting the difference between depreciation and amortization right matters for:

• Accurate financial reporting
• Tax savings
• Smarter decisions about buying, selling, or financing assets

Most businesses use straight-line methods for both because they’re simple and meet common accounting standards. Whether you’re depreciating equipment or amortizing a patent, these non-cash expenses provide real tax benefits and clearer financial statements.

Understanding accumulated amortization vs accumulated depreciation also helps you read your balance sheet more effectively and see how much value your assets still have on paper.