RECOGNIZING DIFFERENCES 2 Recognizing Differences Amortization, depreciation, and depletion are all accounting methods used to prorate the price of a certain type of asset to the life expectancy of that asset. Valuation is used to exactly evaluate an asset. Assets are not usually expected to last beyond a certain length of time, so
accounting principles require that an asset’s cost be reasonably calculated based on the time the
asset was used. Amortization refers to expanding an intangible asset
s cost over the lifespan of that asset. Depletion applies to the spreading out the cost of a natural resource over a certain expanse of time.
Depreciation includes the prorating of a tangible asset’s cost over the lifespan of
the asset. Valuation is generally required by accounting rules to ensure that other possible models are accepted in accounting practices. Determining the value of a
ny company’s assets
is done merely to provide the company and the investors with the value of an asset on the company
’s financial statements.
It is fitting for a company to calculate depreciation using two different methods. It is acceptable as well as practical for a company to actually use several depreciation methods. Companies depreciate their plant assets by using the straight line method on their financial statements while using an advancement method on their tax returns. Several companies also use the depreciation method for the value of equipment over a five or ten year period on financial statement using several years for their taxes. Buildings, furniture, and equipment are assets that will not last forever. During the accounting period, a certain amount of the asset
s lifespan is used up and the portion that is used will be logged as depreciation. The accounting principle allows a company to use methods to add value to assets over the period of the asset
s lifespan. Valuation, depreciation, amortization, and depletion are all methods of accounting that determine