Depreciation vs amortization
Each, defined
Depreciation
Depreciation — Spreading the cost of a fixed asset over the periods it serves.
Amortization
Amortization — Spreading the cost of a finite-lived intangible, a prepaid or a debt discount over the periods it serves.
Side by side
| Depreciation | Amortization | |
|---|---|---|
| Applies to | Tangible: equipment, vehicles, buildings | Intangible: software, patents, customer lists |
| Salvage value | Often | Rarely |
| Methods | Straight-line, declining balance, units of production | Almost always straight-line |
| Contra account | Accumulated depreciation | Accumulated amortization |
A tangible and an intangible asset of the same cost
A $48,000 van with a $6,000 salvage value over five years depreciates by $700 a month. $48,000 of capitalized software over three years, with no salvage, amortizes by $1,333.33 a month.
| Month | Van depreciation | Van net book value | Software amortization | Software net book value |
|---|---|---|---|---|
| Jan 2026 | 700.00 | 47,300.00 | 1,333.33 | 46,666.67 |
| Feb 2026 | 700.00 | 46,600.00 | 1,333.33 | 45,333.34 |
| Mar 2026 | 700.00 | 45,900.00 | 1,333.33 | 44,000.01 |
| Apr 2026 | 700.00 | 45,200.00 | 1,333.33 | 42,666.68 |
| May 2026 | 700.00 | 44,500.00 | 1,333.33 | 41,333.35 |
| Jun 2026 | 700.00 | 43,800.00 | 1,333.33 | 40,000.02 |
How they relate
The mechanics are identical: cost less residual value, divided across the periods that benefit. The vocabulary follows the asset — equipment depreciates, software and patents amortize.
Intangibles rarely have a salvage value and are almost always amortized straight-line. Goodwill and indefinite-lived intangibles are not amortized at all under US GAAP for public companies; they are tested for impairment.
Questions
- Do both affect EBITDA?
- Both are non-cash expenses that are added back in EBITDA and in the indirect cash flow statement.
- Why do loans and prepaids also 'amortize'?
- A loan amortizes as its principal is repaid, and a prepaid amortizes as it is expensed. Same word, same idea: a balance reduced over a schedule.
See it computed
Worked through: the calculators, the journal entries and the tools that use these terms.
- Journal entry for depreciationEach period, debit Depreciation expense and credit Accumulated depreciation for the period's charge. The asset account keeps its original cost; accumulated depreciation, a contra-asset, grows until net book value reaches salvage value.Entry
- Journal entry for capitalized softwareCapitalize qualifying development cost by debiting Capitalized software and crediting the expense it was first booked to (usually wages). Once the software is ready for use, debit Amortization expense and credit Accumulated amortization each month over its useful life.Entry
- Journal entry for prepaid insuranceWhen the premium is paid, debit Prepaid insurance and credit Cash. At each month-end, debit Insurance expense and credit Prepaid insurance for the month's share of the policy, until the prepaid balance reaches zero.Entry
- Depreciation scheduleStraight-line, declining balance or SYD, with the convention that decides the first period.Tool
Definitions are the glossary’s, generated from the same documents. Figures in the examples are computed by tested functions, not typed. General information for US companies under US GAAP, not accounting or tax advice.