Depreciation and Amortization

Depreciation and amortization are accounting methods used to spread the cost of long term assets over their useful lives. Instead of showing the full cost as an expense in one year, accounting spreads it over several years. This gives a more realistic picture of profits.

Depreciation applies to tangible assets such as machines, vehicles, furniture, and buildings. For example, if a business buys a delivery van for $30,000 and expects it to last 5 years, it would not record the entire $30,000 as an expense in one year. Instead, it may record $6,000 each year as depreciation expense.

Amortization is similar but applies to intangible assets such as patents, trademarks, or software. If a company buys software for $10,000 and uses it for 5 years, it may amortize $2,000 per year.

Depreciation does not mean the asset disappears or loses cash value immediately. It is only an accounting method. The business may still use the asset while gradually recognizing its cost.

Depreciation helps match expenses with revenues. If a machine helps generate income for many years, its cost should also be spread over those years.

In simple words, depreciation and amortization help avoid overstating expenses in one year and understating them in others. They make profits more accurate and accounting more fair.