By means of amortization, a limited-life asset’s value is reduced as a result of the passage of time or its use in the production of goods and services through the allocation of its cost over its estimated useful life.  Different terms are commonly used for the amortization of different classes of noncurrent assets:

  • Depreciation – The term used for the periodic allocation of the cost of a tangible fixed asset (property, plant and equipment) other than land and natural resources and the corresponding reduction of its book value over its estimated useful life;
  • Depletion – The term used for the exhaustion of a natural resource, such as mineral deposits, standing timber or oil, through mining, cutting, pumping or other extraction, and the way in which the cost of the natural resource is allocated;
  • “Amortization” – The term generally used only to refer to the periodic allocation of the cost of an intangible asset, such as goodwill or patent, or a financial asset over its economic useful life.

An asset contra account to one or more noncurrent assets that reports the total amount of economic usefulness that has been lost, allocated and expensed since the assets’ acquisition is accumulated depreciation, it reducing the historical cost or revalued amount of an asset to arrive at the book value of assets.  Net property, plant and equipment is the difference between the cost of PP&E and the assets’ accumulated depreciation since asset recognition.  That portion of the historical cost or other cost base of a noncurrent asset that is charged (expensed) against the earnings and credited to accumulated depreciation or accumulated amortization at the end of an accounting period is depreciation expense.

Depreciation Expense and Accumulated Depreciation (Example)
A firm acquired equipment on 1 January 2016 for €10,000 (the firm’s only equipment).  It is depreciated on a straight-line basis over its 10-year useful life and has no residual value.
1 Jan 16 Equipment 10,000
Cash 10,000
To record purchase of equipment on 1 Jan 2016
31 Dec 16 Depreciation Expense 1,000
Accumulated Depreciation 1,000
To record depreciation on 31 Dec 2016

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