Amortization vs. Depreciation

When a business purchases an asset, the life span of the asset is determined. For example, cars usually have a life span of 5 years whereas for other machinery the life span may be 20 years. The business will also determine the value of the asset that is used up every year by the asset over its life span as a consequence of being employed by the business. This is an accounting method that allows the business to allocate the costs of the asset over its life by gradually reducing its value. This reduction in the cost of an asset is recorded on the balance sheet and is referred to as depreciation in relation to tangible assets, and amortization in relation to intangible assets. Therefore, the value of company cars will depreciate over time whereas patent and trademarks are amortized over their life span.