Recognizing Differences

6-14-2015

EXCC/291

Nicole L Smith

Valuation refers to determining a value for something. For accounting purposes, two common valuation options are fair market value and historical cost (net depreciation).
Depreciation is an adjustment to the net income of an entity for wear and tear of fixed assets. The adjustment for depreciation is (in theory) to expense assets over the term of their useful lives.
Amortization is an adjustment to the net income of an entity to expense costs of intangible assets over the estimated useful life of the asset (example: writing off the costs of a noncompete agreement over the life of the agreement).
Depletion is an adjustment to the net income of an entity to record the use or harvesting of its petroleum, minerals, timber, or other reserves.
Accumulated depreciation, accumulated amortization, and accumulated depletion accounts are kept as contra accounts to the historical acquisition price of fixed (tangible) assets being depreciated, intangible assets being amortized, and reserves being depleted.

In accounting the terms depreciation, depletion and amortization often involve the movement of costs from the balance sheet to the income statement in a systematic and logical manner.
Depreciation, depletion and amortization are also described as noncash expenses, since there is no cash outlay in the years that the expense is reported on the income statement. As a result, these expenses are added back to the net income reported in the operating activities section of the statement of cash flows when it is prepared under the indirect method. The term amortization is also used to indicate the systematic reduction in a loan balance resulting from a predetermined schedule of interest and principal payments. It is acceptable and common for companies to depreciate its plant