DEPRECIATION VS. AMORTIZATION
When do accountants use the term ‘depreciation’ or ‘amortization’?
When they talk about different types of fixed assets (fixed – assets which are not likely to be converted quickly into cash).
Depreciation
it is a reduction in the value of a tangible asset (e.g. land, machinery, vehicles, equipment, inventory) over time due to wear and tear.
Amortization
it is a reduction in the value of an intangible asset (the one that is not physical in nature e.g. Goodwill, brand recognition, intellectual property) over time.
METHODS OF DEPRECIATION
The popular methods of depreciation include:
Straight-line
depreciation is in equal amounts over the estimated life of the asset.
Double Declining Balance
is an accelerated method, which counts as an expense twice as much of the asset’s book value each year compared to straight-line depreciation.
Unit-of-production
is usesuful when an asset’s value is related to the number of units it produces and not necessariliy the number of year it is in use.
EXERCISE
Let’s compute depreciation using the Straight-line method:
Cost – how much the company paid for the asset
Salvage Value (residual or scrap value) – the estimated book value of an asset after depreciation is complete
Estimated life of asset / Useful life – the estimated number of years the asset is likely to remain in service
Annual depreciation – yearly depreciation
e.g. The company purchased a car for PLN 40.000 – cost of asset, estimated life – 5 years, estimated salvage value – PLN 8.000
Cost – Salvage Value/Estimated life = Annual Depreciation
PLN 40.000 – PLN 8.000/5 years = PLN 6.000
ANSWER
Therefore the annual depreciation of this tangible asset (a car) will amount
PLN 6.000.
Below you will find the glossary of terms (EN-PL) and a video explaining the above mentioned methods of depreciation:
Glossary – EN – PL
Depreciation – amortyzacja środków trwałych materialnych
Amortization – amortyzacja środków trwałych niematerialnych i prawnych
Assets – majątek, środki
Fixed asset – środek trwały
Tangible asset – środek trwały materialny
Intangible asset – środek trwały niematerialny
Reduction in value – spadek wartości
Goodwill – wartość firmy
Straight-line depreciation – metoda liniowa amortyzacji
Declining-balance depreciation – metoda degresywna amortyzacji
Units-of-production depreciation – metoda amortyzacji przypadająca na jednostkę wyprodukowaną
To compute – obliczyć
To purchase – zakupić
Salvage / scrap / residual value – wartość umorzeniowa, cena po amortyzacji
Estimated life of an asset / Useful life – czas użyteczności środka
Annual depreciation – amortyzacja roczna
Sign up for online course, CONTACT me.
Watch the video to find out more:
Do you want to learn English for Finance?
CONTACT ME