Understanding Asset Depreciation and Amortization
The purchase of an asset can help you reduce your tax burden in future years. This is thanks to tools such as depreciation and amortization, whose objective is to record the loss of value over time of an asset. The main difference between depreciation and amortization is that the former focuses exclusively on tangible fixed assets, while amortization focuses on intangible and deferred assets. In practice, both operate by allowing the deduction from income of the expense incurred for the loss in value of the company's assets as a result of the passage of time.
Before going into the types of amortization, it is important to note that this practice is only reflected at the accounting level, so there will be no movement of money or cash, but rather the loss of value will be discounted as an expense.
The types of amortization and depreciation depend on the accounting standards followed by each country, as for example in the USA GAAP (Generally Accepted Accounting Principles). In general, one of the best known depreciation methods is straight-line depreciation, according to which the loss in value of the asset is considered based on time and not the use of the asset. For example, if we have a $100 asset to which we apply a 5-year depreciation, we would record an expense of $20 each year.
Existen otros métodos como la depreciación acelerada, en la cual se imputa una mayor parte del gasto al primer año; la depreciación por producción la cual toma en cuenta la cantidad de unidades que se estima que producirá el activo y las producidas en el año en curso, entre otros.
In the case of amortization, it is important to note that this applies to both assets and debts. In the latter case, the American amortization method consists of deducting the interest installments monthly, and paying the principal in full in a final installment.
In conclusion, depreciation and amortization are accounting tools that allow you to comply with the principle of the association of revenues, costs and expenses for the presentation of your financial statements. Also, this allows us to spread the cost of an asset over a number of years and thus have comparable years, instead of one year with a disproportionate expense and other years with lower expenses.
If you want to learn more about the best practices for your accounting records, do not hesitate to contact our Smartkeep team and we will gladly support you.