Home > Topics > Foundation – Paper 1 – Accounting > Depreciation vs Amortization vs Depletion
← PreviousNext →

Depreciation vs Amortization vs Depletion

"Three ways to spread costs - each for different types of assets."

All three concepts involve allocating cost over time, but they apply to different types of assets.

The Big Picture

Depreciation
↓
Amortization
↓
Depletion

1. Depreciation

Definition: Systematic allocation of cost of tangible fixed assets over their useful life.

Applies To:

  • Machinery & Equipment
  • Buildings
  • Vehicles
  • Furniture & Fixtures
  • Computers

NOT Applicable To: Land (doesn't deplete)

Methods: SLM, WDV, Units of Production

Example:

  • Machine cost: ₹10,00,000
  • Life: 10 years
  • Annual Depreciation (SLM): ₹1,00,000

2. Amortization

Definition: Systematic write-off of intangible assets over their useful/legal life.

Applies To:

  • Patents: 20 years (legal life)
  • Copyrights: Author's life + 60 years
  • Trademarks: 10 years (renewable)
  • Goodwill: Over expected benefit period
  • Software: 3-5 years
  • Preliminary Expenses: Written off over 3-5 years

Method: Usually Straight Line (equal amounts over life)

Example:

  • Patent cost: ₹20,00,000
  • Legal life: 20 years
  • Annual Amortization: ₹1,00,000

3. Depletion

Definition: Reduction in value of natural resources due to extraction.

Applies To:

  • Coal Mines
  • Oil & Gas Wells
  • Quarries
  • Forests (timber)
  • Mineral Deposits

Method: Units of Production method

Formula:

Depletion per unit = (Cost - Residual Value) / Total estimated units

Total Depletion = Depletion per unit × Units extracted

Example:

  • Coal mine cost: ₹50,00,000
  • Estimated coal: 1,00,000 tons
  • Depletion per ton: ₹50
  • If 10,000 tons extracted: Depletion = ₹5,00,000

Detailed Comparison

Loading comparison…

Journal Entries

Depreciation

Depreciation A/c               Dr.    ₹1,00,000
    To Machinery A/c                      ₹1,00,000
(Being depreciation charged on machinery)

Amortization

Amortization A/c               Dr.    ₹50,000
    To Patent A/c                         ₹50,000
(Being amortization of patent)

Depletion

Depletion A/c                  Dr.    ₹5,00,000
    To Coal Mine A/c                      ₹5,00,000
(Being depletion charged on extraction of 10,000 tons)

Real-World Case Studies

Loading case study…

Special Cases

Goodwill Amortization

AS-10 (Old): Goodwill was amortized over useful life (max 5 years).

Ind AS-38 (Current): Goodwill is NOT amortized. Instead, tested annually for impairment.

Example:

  • Company A buys Company B for ₹100 Cr
  • Net assets of B: ₹70 Cr
  • Goodwill: ₹30 Cr
  • Treatment: Test annually, write down if impaired (no systematic amortization)

Software - Depreciation or Amortization?

Depends on nature:

Loading comparison…

Tax Perspective

Income Tax Act allows:

  • Depreciation: Yes, at prescribed rates (machinery 15%, building 10%, etc.)
  • Amortization: Yes, for certain intangibles (patents, copyrights)
  • Depletion: Yes, special provisions for mining/extraction industries

Key: Only WDV method allowed for tax purposes (not SLM).

Memory Trick

Loading note…

Quiz: Depreciation vs Amortization vs Depletion

Loading quiz…

← PreviousNext →