The difference between amortization and depreciation is that they are different in nature, different in cost period, and different in calculation method.
1, the nature of different: depreciation is an asset, amortization is an expense. Depreciation generally refers to the depreciation of fixed assets. Amortization is generally amortization of low value consumables, amortization of intangible assets, amortization of amortized expenses, amortization of long-term amortized expenses.
2, the cost of different periods: depreciation and amortization are gradually included in the cost of expenses, but included in the period of time is different. Depreciation of at least two years. And amortization in addition to long-term amortized expenses, are amortized within one year.
3, the calculation method is not the same: the calculation of depreciation: the average life method, also known as the straight-line method, the workload method, the double-declining-balance method, the sum-of-the-years method. The calculation of amortization: an amortization method, amortization method, five-by-five amortization method.
Significance of Amortization and Depreciation
Depreciation and amortization can go into costs and expenses, which reduces the income tax payable. The reduction in cash outflow because of less income tax paid is what is commonly referred to as depreciation against tax. Thus reducing cash outflows and saving cash that can be used to pay off loans.
Depreciation of fixed assets, given that the project has not yet faced the problem of updating fixed assets at the initial stage of production, the depreciation fund, which is in the nature of a reserve for the replacement of fixed assets, is temporarily inactive after it has been withdrawn.
In order to effectively utilize all possible sources of funds to shorten the loan repayment period and strengthen the project's solvency, part of the new depreciation fund can be used as a source of loan repayment. However, after the project draws down the amortization charge, this fund has no specific purpose, has the nature of "precipitation", so it can be used to repay the loan.
Refer to Baidu Encyclopedia - Amortization