Depreciation vs. Amortization

Let us talk about the difference between depreciation and amortization.

When it comes to the asset related to the depreciation, typically it's a tangible asset that you can touch like a truck or a piece of equipment or a building.

With amortization, it's an intangible and that is typically like an intellectual property or a patent or a software license.

The recording of these items, you always use the matching principle.

So we have to allocate the cost of the asset over a number of years based on the matching principle that says the matching the expense with the benefit that you get from this asset.

So for a truck, for example, that's going to represent maybe 10 years representing the wear and tear of the truck.

While for intangible asset, you break that based on the number of years in the contract representing the consumption of the economic benefit.

Now, the number of years for depreciation is gonna be from the guidance from the FASB, the Financial Accounting Standards Board, while with amortization, the number of years is gonna depend on the contract or the agreement that you entered into.