Depreciation And Amortization

Depreciation and amortization are accounting transactions that record the loss in value of long-term assets. Here's an example of depreciation and amortization: A company buys a new machine for $5,000 that it expects to use 5 years and then discard. It then records depreciation of $1,000 each year of the machine's five-year "useful life." ("Depreciation" is usually used for physical property, like cars, and "amortization" for nonphysical assets like goodwill.)

Depreciation and amortization have major measurement problems. Unlike the example above, assets often lose their value unvenly over time, so depreciation and amortization may be over- or understated for any given year. To better match the recording of depreciation and amortization to actual asset deterioration, accountants have developed various depreciation and amortization methods, like sum-of-the-years digits. Note that depreciation and amortization is an expense on the income statement. In contrast, accumulated depreciation is a balance sheet item that totals the depreciation and amortization expense already taken on long-term assets.