Can someone explain depreciation and amortization?

Can someone explain these in a way that seems easy enough to explain to someone else

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  • 1 decade ago
    Favorite Answer

    Depreciation is simply loss of value, usually due to wear and tear. The most obvious example is an automobile. As time goes on, the vehicle becomes less valuable because parts are worn and replaced and the overall condition generally worsens.

    If a borrower is paying off a loan over a number of years, interest is added on a regular, periodic basis to the principle (borrowed amount).To keep the payment from increasing over the life of the loan, an amortization table calculates the total amount of interest added to the principle over the life of the loan and spreads it out among all of the payments.

  • 1 decade ago

    Depreciation is the slow expense of an asset over its useful life. When a business buys an asset like a building they must expense the value. If they bought the property for $125,000 and plan to move in 5 years the would expense $25,000 a year on their yearly statements for tax purposes. Amortizing is the same thing except with a asset that has no physical form.

  • Anonymous
    1 decade ago

    Depreciation is a term used in accounting, economics and finance with reference to the fact that assets with finite lives lose value over time.

    Amortization is the distribution of a single lump-sum cash flow into many smaller cash flow installments, as determined by an amortization schedule. Amortization is chiefly used in loan repayments and in sinking funds

  • 5 years ago

    H & R Block had allowed this client to take depreciation and Mileage. It is my understanding if you take depreciation you must take actual expenses, such as, gasoline, repairs and insurance cost. This is correct right. This H & R return has totally blowed my mind. I am not at the office and none of the examples explain what I consider common sense. LR

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  • T H
    Lv 4
    1 decade ago

    It's the application of the "Matching Principle".

    You are taking the cost of something you bought, and spreading out over the time you think you will be using it.

    So, you will get to take a little bit of the expense of it every period it is used, instead of taking it all at once.

    It is like picking it apart, piece by piece.

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