The Lemon Fool

OK, so the last accounting class I took was in the 1970s. But chatting to someone about EBITDA recently, I struggled to explain the difference between depreciation (the "D" in EBITDA) and amortisation (the "A").

To me, they're awfully similar.

What am I missing?

MDW1954

I don't like ebitda but it is about cash generation

MDW1954 wrote:OK, so the last accounting class I took was in the 1970s. But chatting to someone about EBITDA recently, I struggled to explain the difference between depreciation (the "D" in EBITDA) and amortisation (the "A").

To me, they're awfully similar.

What am I missing?

MDW1954

Good question in that they often appear to be used interchangeably, at least colloquially. I don't know the precise answer but some places seem to suggest that amortisation is applied to intangible assets such as goodwill, whereas depreciation is applied to tangible fixed assets or whatever they may be called nowadays.

I imagine all would be clearer if one had the time to look at a quoted company's accounting policies but, being a fairly dry subject, I'll leave that to others.

To my mind, depreciation is writing down the value of a wasting asset, while amortization is writing off the cost of an asset, wasting or not.

TJH

My recent research just suggests that currently D and A really refer to the same concept, i.e. the writing down of somethings value.

I think that whether the thing goes in accounting box D or A depends on what that thing is. If it's tangible like a machine, it goes in box D, if it's not, e.g. a patent (i.e. the purchase cost of buying it in) in goes in box A.

See:

https://www.investopedia.com/ask/answer ... iation.asp

Matt

Thanks, all. Most helpful!

MDW1954