Difference Between Depletion And Amortization

THE DIFFERENCE BETWEEN AMORTIZATION AND DEPLETION

Amortization is a way for businesses to write off the loss of value of an asset over the course of its lifetime .This method of writing off lost cost applies to all intangible assets owned by a company. All of these intangible assets lose value over time -- companies write this lost value off through amortization.

Whereas, Depletion is a method of accounting associated with the acquisition, exploration and development of new oil and natural reserves. Depletion is used to allocate the cost of extracting natural resources from the earth, and is the actual physical depletion of a natural resource by a company.

Amortization is charged on the cost of the intangible asset whereas depletion is charged

When a patent is purchased from another company, the cost of the patent is the purchase price. If a company invents a new product and receives a patent for it, the cost includes only registration, documentation, and legal fees associated with acquiring the patent and defending it against unlawful use by other companies.

Copyrights: Copyrights provide their owner with the exclusive right to reproduce and sell artistic works, such as books, songs, or movies. The cost of copyrights includes a nominal registration fee and any expenditure associated with defending the copyright. If a copyright is purchased, the purchase price determines the amortizable cost. Although the legal life of a copyright is extensive, copyrights are often fully amortized within a relatively short period of time. The amortizable life of a copyright, like other intangible assets, may never exceed forty years.

Contract: A business contract is a legally binding agreement between two or more parties to do or not to do certain things. For example, a business contract could be for the sale of goods or supply of services at a certain price. a contract is formed when one party makes an offer and that offer is accepted by another party for an exchange of some benefit or something of value by the parties (this is the consideration element). The intention of the parties is that they are legally bound by the

The excess payment may result from the value of the company's reputation, location, customer list, management team, or other intangible factors. Goodwill may be recorded only after the purchase of a company occurs because such a transaction provides an objective measure of goodwill as recognized by the purchaser. The value of goodwill is calculated by first subtracting the purchased company's liabilities from the fair market value (not the net book value) of its assets and then subtracting this result from the purchase price of the company.

CHARGING AMORTIZATION

If an intangible asset has a finite useful life, we should amortize it over that useful life. The amount to be amortized is its recorded cost, less any residual value. However, intangible assets are usually not considered to have any residual value, so the full amount of the asset is usually amortized. Just like depreciation many methods can be used for amortization however, the customary approach is to amortize using the straight-line method.

EXAMPLES

In the case of patents, if the company believes the patent's useful life is ten years and its worth is $100,000, the straight‐line method is used to calculate that $10,000 ($100,000 ÷ 10 = $10,000) must be recorded as amortization expense each year.

One way to record amortization expense of $10,000 is to debit amortization expense for $10,000 and credit accumulated