Depreciation & Amortization

The sum of depreciation and amortization.

Depreciation refers to a method of spreading out the cost of company’s tangible assets over its useful life period.

For accounting purposes, when company buys long-term assets it doesn’t reflects this expenditure as immediate expense. Company would capitalized the value of this asset and then spread out cost of its purchase in portions over its useful life period as depreciation expense. This method in a sense reflects economic nature of long-term assets as resources that bring benefits during long period of time (useful life period).

Also for taxation purposes, depreciation provides company a tax shield, because it is an expense and thus it is not taxable.

Amortization is a similar term with depreciation but it refers to intangible assets.

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