Depreciation and Amortization

It can be a bit overwhelming and confusing when doing your business accounting. So many boxes, so many inventories, so many accounting terms you’ve never heard before! However, once you understand the accounting terms that the VAS uses, your journal will feel way more manageable. Let’s take a brief moment to discuss the 2 accounting terms of Amortization and Depreciation. These words come up a lot, especially as they relate to your assets’ value, but many internal accountants do not know how to distinguise two of them.

1.    What is an asset?

According to Investopedia, “An asset is anything of value or a resource of value that can be converted into cash. Individuals, companies, and governments own assets. For a company, an asset might generate revenue or the company might benefit in some way from owning or using the asset.” That’s to say, assets are resources under the control of an enterprise that can bring future economic benefits to businesses.

2.    Depreciation of fixed assets:

Fixed assets lose value as they age when a business make use of it. When referring to tangible assets, we should know that they are physical assets and can be touched. There are some examples of tangible assets that are commonly depreciated include:
•    Equipment
•    Buildings/ plants
•    Machinery
•    Office furniture
•    Land
•    Vehicles and motors

Depreciation is calculated by subtracting the asset’s salvage value (value that an owner is paid when the item is sold at the end of its useful life) or resale value from its original cost over the years of the expected life of the asset. The value is based on an subjective estimate of the asset’s value, or can be determined by regulations. That’s to say, the depreciated amount which is expensed in every year is a tax deduction for the company until the asset’s useful life is expired.
As an example, a agrimotor can be used for 8 years before it becomes run down and is sold. The cost of the machine is spread out over 8 years, with a portion of the cost being expensed in each accounting year.

3.    Amortization:

Amortization is like depreciation, but it is used to lower the cost value of a finite-life or intangible asset. Examples of non – physical assets that are expensed through amortization might include:
•    Cost of issuing bonds to raise capital
•    Patents and trademarks
•    Proprietary processes like copyrights
•    Franchise agreements
•    Organizational costs

The caculation of amortization is that the same amount is expensed in each period over the asset’s useful life, which is not related to resale or salvage value, unlike with depreciation. The term amortization is used in both accounting and in lending with completely different definition, meaning, uses. Thus, it’s important to be careful when using the term amortization as it carries another meaning.

When you team up with S4B, accounting has no longer been a hard task to your business. We provide the best accounting practices and streamline your fiancial situation to help you know how to take the right actions for positive results.


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