Difference Between Amortization and Accumulated Amortization
Amortization and accumulated amortization are two concepts of the same part. Amortization refers to the loss of value at a given time. Meanwhile, the accumulated amortization is the sum of the amortizations up to that moment.
In other words, amortization is a static concept. For its part, accumulated amortization is a dynamic concept. The second is calculated as the sum of amortizations in previous periods.
The difference between amortization and accumulated amortization is a purely accounting difference.
Difference between amortization and accumulated amortization
We must distinguish, to fully understand this concept, the difference between amortization and accumulated amortization:
- Amortization: It is an expense account that is used in order to distribute the loss of the value of the purchased good among all the exercises in which it is going to be used. Instead of declaring a huge loss at the end of its useful life, it tries to reflect the losses in value of our machine from year to year.
The logic of this practice is that although a good ceases to be useful at a given moment, it does not only lose value that year. For example, an industrial machine. If everything were imputed in a single exercise, the company's accounts would be distorted. Since they would throw huge expenses. These expenses, in reality, must be distributed among all the exercises in which it is producing. This is because the asset depreciates progressively.
- Accumulated depreciation: It is an asset account that reduces the value of the asset to which it is linked (appears in negative). It adds up the depreciation for all years, which can also be considered as the gradual loss of value of the asset depending on its proximity to the end of its useful life. In this way, if we subtract the value of the accumulated depreciation from the value of our machine, we obtain the book value of it in each year. Every year it will be less.
Relationship between depreciation, accumulated depreciation and book value
The following graph shows perfectly the relationship between these three concepts. The machine (if amortized using a straight-line method ) is amortized by the same amount each period. As the years go by, the accumulated amortization increases. Consequently, the book value of the machine is reduced.
As a curious fact, when we amortize a good, we can amortize it with different methods. The best known methods are:
- Linear accounting amortization
- Growing accounting depreciation method
- Declining accounting amortization method
Everything is said, companies have certain legal limitations when choosing between some methods and others.