Accounting is an important field, on which many industries depend. There are some terms which are commonly used in Accounting, but people used them mistakenly. Sometimes they are used at wrong places. Here we are discussing the difference between depletion, depreciation and Amortization.
This accounting concept is usually used in mining, timber, petroleum and other industries of the same kind. The depletion deduction allows an owner to account for the reduction of a producer’s reserves. It is cost recovery system for accounting and tax reporting. We can divide it into two categories, Cost depletion and percentage depletion.
This term refers to two different concepts. It is the decline in the value of assets and the allocation of the cost of assets for which period these assets were used. In this way it affects the value of business, entities and net income. There are many methods of computing depreciation; some of them are fixed percentage, straight line and decline balance.
Amortization is the process of decreasing an amount over a period. Usually a table is made, called as amortization table, which shows the ratio of principal and interest and demonstrates how the principal amount of loan decreases over time.
Depletion vs Depreciation vs Amortization
All these terms are related to each other but yet they are different. An accountant has to use them very frequently. So, it is important to differentiate between them. Depletion and depreciation are similar terms as depreciation is reduction in the value of assets, while depletion is reduction of producer’s reserves. Amortization is also same, but in this concept we specify a definite period of time. There are different methods for calculating all of them; rather many different methods are used to calculate every single term. Amortization is used for intangible assets while depreciation is used for tangible items.
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