Amortization, Depreciation, And Depletion: An Overview

Amortization, Depreciation, And Depletion: An Overview
The cost of business assets can be spread and expensed each year over the life of the asset. The expense amounts can be used as a tax deduction reducing the tax liability for the business.

Amortization

Amortization is the practice of spreading an intangible asset's cost over that asset's useful life. Intangible assets are not physical assets. Examples of intangible assets that are expensed through amortization can include:
Cost of issuing bonds to raise capital
Organizational costs
Franchise agreements
Copyrights
Patents and trademarks
In amortization, the same amount is expensed in each period over the asset's useful life. Assets that are expensed using the amortization method typically don't have any resale or salvage value, unlike with depreciation.
An amortization schedule is also used to calculate a series of loan payments consisting of both principal and interest in each payment, as in the case of a mortgage.
The term amortization is used in accounting and in lending with totally different definitions.

Depreciation
Depreciation is the spreading and expensing of a fixed asset over its useful life. Fixed assets are tangible assets, meaning they are physical assets that can be touched. Examples of fixed or tangible assets that are commonly depreciated include:
Buildings
Equipment
Office furniture
Vehicles
Land
Machinery
Depreciation is calculated by subtracting the asset's salvage value or resale value from its original cost. The difference is depreciated evenly over the years of the expected life of the asset. The depreciated amount expensed in each year is a tax deduction for the company until the useful life of the asset has expired.
The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed in each accounting year.
Vehicles are typically depreciated on an accelerated basis.

Depletion
Depletion refers to the allocation of the cost of natural resources over time. An oil well for example, has a finite life before all of the oil is pumped out. The oil well's setup costs are spread out over the predicted life of the well.