Amortization

Amortization is a method of recording the capital expenses especially on intangible assets such as patent, copyrights (which is purchased), goodwill, etc. over a particular period of time. However, it must not be compared or confused with depreciation since depreciation is concerned only with the tangible assets. But it must be understood that this is just a book entry and it does not involve any cash outflow. This is generally done for income tax reduction practice.  It is paying off the debt in monthly or regular installments over a period of time. The deduction of the capital expenses over a particular or given period of time.  It is similar to depreciation; it is a system of measuring the consumption of the value of long-term assets such as buildings or equipment.

Now let us taken an example, of the amortization of your car every year- If you purchased a car for 30,000 dollars and after the first year its value will be 26,000 dollars, hypothetically, you can amortize the 4,000 dollars for financial purpose and tax. Whereas the depreciation only refers to Tangible Asset such as cars, building etc and amortization only refers to intangible assets such as bonds, patents etc.

Difference between depreciation and amortization 

Amortization generally refers to spreading the intangible asset's cost over that useful life of the assets. For instance, a patent on a part of medical equipment generally has a life of 16 years. The cost involved with making the medical equipment is spread out over the life of the patent, with each parts being posted as an expense on the firm's income statement. Conversely, depreciation refers prorating a tangible asset's cost over that asset's life. For instance, a house could be used for several years becomes old or run down and sold. The cost of the house is spread out over the expected life of the house, with a part of the cost being expensed every fiscal year and intangible assets.