Depreciation vs Amortization
Tangible vs Intangible Assets · Causes of Depreciation · Journal Entries · Balance Sheet Impact
📝 Handwritten Class Note
CA Devesh Thakur’s handwritten note for Day 14 — save it for quick revision!
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Depreciation vs Amortization — Kya Fark Hai?
Dono concepts ek hi idea se aate hain — asset ki value samay ke saath ghatti hai. Fark sirf itna hai: Depreciation Tangible Assets (Machine, Building, Furniture) par lagti hai, aur Amortization Intangible Assets (Patent, Trademark, Goodwill, Software) par. Dono hi P&L mein Expense jaate hain aur Balance Sheet pe asset ki value reduce karte hain. Yeh dono Non-Cash Expenses hain — matlab paisa bahar nahi jaata, sirf value ghatti hai!
📌 Depreciation vs Amortization — Side by Side
Depreciation
Tangible Assets ki ghadti hui value
Jab hum koi Tangible Asset (Machine, Building, Furniture, Vehicle etc.) khareedte hain, to uski value samay ke saath kam hoti jaati hai.
Causes: Usage, Wear & Tear, Passage of Time, Obsolescence (Nai Technology aane se purani ho jaana).
📍 Nature: Non-Cash Expense → P&L mein jaata hai. Asset ki value Balance Sheet mein reduce hoti hai.
Amortization
Intangible Assets ki ghadti hui value
Intangible Assets — Patent, Trademark, Copyright, Goodwill, Software — inki bhi value samay ke saath kam hoti hai.
Process: Value ko systematically reduce karne ki process ko Amortization kehte hain.
📍 Nature: Expense → P&L mein jaata hai. Intangible Asset ki value Balance Sheet se reduce hoti hai.
⚙️ Causes of Depreciation — 4 Reasons
1. Usage (Use Karne Se)
Jitna zyada asset use hogi, utni zyada value ghatti hai. Machine daily chalane se uski working life kam hoti jaati hai.
2. Wear & Tear (Ghisne Se)
Physical deterioration — asset ke parts ghiste hain, toote hain, aur over time value automatically kam hoti hai.
3. Passage of Time (Purana Ho Jaana)
Time guzarne ke saath — chahe use ho ya na ho — kuch assets (leasehold, patents) naturally expire hoti jaati hain.
4. Obsolescence (Purani Technology)
Nai technology aane se purani machine ki value aur usefulness dono kam ho jaati hain — chahe physically theek ho.
✍️ Journal Entries — Depreciation & Amortization
Depreciation — Tangible Asset ka value reduce karna
Non-Cash Expense — P&L Dr. side, Asset value reduce
📋 P&L Treatment
Depreciation A/c → Debit side of P&L (Expense). Net Profit reduce hoga — Non-Cash expense hai.
📊 B/S Treatment
Asset A/c value reduces. Cost – Accumulated Depreciation = Net Book Value (shown on Asset side).
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Depreciation A/c Nominal (Non-Cash Expense — P&L Dr. side) | XX | — | |
| Asset A/c (Machine/Building etc.) Real (Asset value reduced on B/S) | — | XX |
Amortization — Intangible Asset ka value systematically reduce karna
Patent, Trademark, Goodwill, Software, Copyright
📋 P&L Treatment
Amortization A/c → Debit side of P&L (Expense). Same as Depreciation — reduces net profit.
📊 B/S Treatment
Intangible Asset A/c value reduces on Balance Sheet. Ultimately value reaches zero when fully amortized.
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Amortization A/c Nominal (Expense — P&L Dr. side) | XX | — | |
| Intangible Asset A/c Real (Patent/Goodwill/Software etc. — B/S value reduced) | — | XX |
Common Exam Mistakes
1. Depreciation vs Amortization mix-up: Always check — Tangible = Depreciation, Intangible = Amortization. Wrong pairing = wrong answer.
2. Cash vs Non-Cash: Dono NON-CASH expenses hain. Paisa bahar nahi jaata — sirf value ghatti hai in books.
3. Journal Entry: Always Debit the Depreciation/Amortization A/c (Expense) and Credit the Asset A/c (not Cash A/c).
4. Land: Land par KABHI Depreciation nahi hoti — land ki value ghatti nahi (generally). Only depreciable assets qualify.
Easy Memory Trick
Depreciation → Tangible (D aur T — Dono mein physical presence hai — “Dekh sakte ho”)
Amortization → Intangible (A aur I — “Andekha” assets — dekh nahi sakte, sirf feel hota hai)
Dono = Non-Cash Expense → P&L Dr. side → Asset value reduce on B/S
Connection with Previous Days
Day 9 (Real A/c): Assets = Real A/c. Depreciation credit karta hai Real A/c ko — value reduce hoti hai. “Come in Debit, Go out Credit” — asset value jaati hai isliye Credit.
Day 9 (Nominal A/c): Depreciation & Amortization = Nominal A/c (Expense) — Debit hota hai → P&L mein jaata hai.
Day 10 (Accrual & Matching Concept): Depreciation har year charge karte hain — asset ka benefit jo is year liya, uske against expense match karte hain.
📊 Quick Summary — Depreciation vs Amortization
| Feature | Depreciation | Amortization |
|---|---|---|
| Applies To | Tangible Assets (Machine, Building, Vehicle) | Intangible Assets (Patent, Goodwill, Software) |
| Nature | Non-Cash Expense | Non-Cash Expense |
| Journal — Debit | Depreciation A/c (Nominal) | Amortization A/c (Nominal) |
| Journal — Credit | Asset A/c (Real) | Intangible Asset A/c (Real) |
| P&L Impact | Dr. side — reduces profit | Dr. side — reduces profit |
| B/S Impact | Asset value reduces | Intangible asset value reduces |
| Examples | Machine, Building, Furniture | Patent, Trademark, Copyright, Goodwill |
