The concepts of depreciation and amortization have a lot in common and are associated with the depreciation of production assets. Meanwhile, they are not identical and should be distinguished from each other.
Depreciation and amortization
A significant share of the company's costs are associated with the cost of capital resources (equipment, premises). Their peculiarity lies in the fact that they are not consumed in one production cycle, like raw materials, but serve for years. But at the same time they are subject to wear and tear.
Depreciation is the process of an object losing its characteristics, resulting in a decrease in its value and depreciation. This may apply to such fixed assets of the enterprise as equipment, buildings, transport, etc.
In the economic sense, physical and moral deterioration is distinguished. Physical wear and tear is associated with the deterioration of property when it loses its properties as a result of aging when using this property. It is calculated as the ratio of the useful life of an asset to its standard service life. Obsolescence occurs as a result of the partial loss of fixed assets of their value as a result of the emergence of new, more advanced technologies or under the influence of other factors.
Depreciation is the process of partial transfer of the cost of fixed assets as they are depreciated to the cost of production. It is carried out using the rates of depreciation deductions.
There is a so-called circulation of fixed assets. It includes three stages: depreciation, amortization and reimbursement. Depreciation and amortization are carried out in the process of using fixed assets in production, compensation - when they are created and restored.
Comparison of depreciation and wear
Based on the comparison of the concepts of depreciation and depreciation, the following differences can be distinguished:
- by time of occurrence - depreciation is charged as a result of depreciation of fixed assets, i.e. is its consequence;
- depreciation is the monetary equivalent of the depreciation of fixed assets, while depreciation has no monetary value;
- depreciation does not necessarily depend on the level of depreciation - for the object, the cost can be fully depreciated, while it has not yet been fully depreciated and is subject to future use; the opposite situations also occur - when the equipment fails before the complete write-off of its cost;
- companies can independently determine depreciation rates;
- in accounting, the term depreciation is not used, only depreciation; wear is a concept from the field of financial analysis;
- the term depreciation is enshrined in law, while there is no legal definition of depreciation;
- depreciation - a decrease in the cost of fixed assets and an indicator of equipment obsolescence, and depreciation - a transfer to the cost of manufactured products, which allows you to restore the fixed assets fund.
