Depreciation and Amortization
Depreciation and amortization refer to the process in which a company allocates the original value of long-term assets to various accounting periods during their useful lives according to a certain ratio. Depreciation primarily applies to fixed assets, while amortization primarily applies to intangible assets and long-term prepaid expenses.
Definition: Depreciation and amortization refer to the process by which a company allocates the original value of long-term assets over their useful life to various accounting periods. Depreciation mainly applies to fixed assets, while amortization mainly applies to intangible assets and long-term deferred expenses.
Origin: The concepts of depreciation and amortization originated in accounting to more accurately reflect the value and usage of a company's assets. As early as the 19th century, with the development of the Industrial Revolution, companies began to realize the need to allocate the cost of fixed assets over multiple accounting periods to more accurately calculate profits.
Categories and Characteristics:
- Depreciation: Applies to fixed assets such as machinery, buildings, and vehicles. Common methods of depreciation include the straight-line method, double declining balance method, and sum-of-the-years-digits method. The characteristic of depreciation is that the expense is relatively fixed each period, making it easier for companies to control costs.
- Amortization: Applies to intangible assets and long-term deferred expenses such as patents, trademarks, and software. The method of amortization is usually the straight-line method, which evenly allocates the expense over the asset's useful life. The characteristic of amortization is that the expense allocation is relatively even, helping companies better plan their finances.
Specific Cases:
- Case 1: A company purchases a machine worth 1 million yuan, with an expected useful life of 10 years and a residual value of 100,000 yuan. Using the straight-line method, the annual depreciation expense is (1 million yuan - 100,000 yuan) / 10 years = 90,000 yuan.
- Case 2: A company purchases a patent worth 500,000 yuan, with an expected useful life of 5 years. Using the straight-line method, the annual amortization expense is 500,000 yuan / 5 years = 100,000 yuan.
Common Questions:
- What is the difference between depreciation and amortization? Depreciation applies to fixed assets, while amortization applies to intangible assets and long-term deferred expenses.
- Why perform depreciation and amortization? Depreciation and amortization help companies more accurately reflect the value and usage of assets, facilitating cost control and financial planning.
