Explain depreciation vs amortization and provide examples.

• A. Depreciation is for tangible assets; amortization is for intangible assets; both allocate cost over useful life.
• B. Depreciation is for intangible assets; amortization is for tangible assets.
• C. Depreciation and amortization both apply only to cash expenditures.
• D. Depreciation increases asset value; amortization decreases liabilities.

Answer: (A)

Depreciation and amortization are ways to spread the cost of long-lived assets over the period they help generate revenue. Depreciation applies to tangible things like equipment, vehicles, or buildings, while amortization applies to intangible assets such as patents, copyrights, trademarks, or software licenses with finite lives. Both methods reduce reported profit by allocating a portion of the asset’s cost each year, rather than taking the entire cost in the purchase year.

Example: a machine purchased for $50,000 with a 10-year useful life (straight-line) would show $5,000 of depreciation each year. Example: a patent purchased for $80,000 with an 8-year life would show $10,000 of amortization each year. Intangible assets with indefinite life, like goodwill, aren’t amortized in the same way and are tested for impairment instead.

These are non-cash expenses that affect net income but not the actual cash outlay in the period. The other statements are inaccurate because depreciation is not for intangible assets, these allocations are not about cash expenditures, and they don’t directly increase asset value or decrease liabilities.