How_Money_Works_-_The_Facts_Visually_Explained

Depreciation,

amortization, depletion

The cost of a company’s assets and its use of natural resources can be

deducted from its income for accounting and tax purposes. Depreciation,

amortization, and depletion allow the company to spread this cost.

USEFUL ECONOMIC

LIFE (YEARS)

ANNUAL

= DEPRECIATION ($)

PURCHASE

VALUE

SCRAP

− VALUE

ANNUAL

= AMORTIZATION ($)

INITIAL COST

USEFUL LIFE

Calculating depreciation

A delivery company buys a van for $25,000. Over time, the

vehicle will need to be replaced. The company can record

the reduction in the value of the vehicle in its accounts as depreciation.

Calculating amortization

A company buys the patent for a computer design. The initial

cost of this intangible asset can be gradually written off over

several years and can be used to reduce the company’s taxable profit.

VALUE ($)

$25,000

$20,000

$15,000

$10,000

$5,000

0 1 2

$21,000

VALUE ($)

$25,000

$20,000

$15,000

$10,000

$5,000

0 1 2 3

5

$25,000 − $5,000 = $4,000

$21,000 7 = $3,000

Calculating depletion

A forestry company knows that it has a finite number of trees.

Depletion records the fall in value of the forest with its

remaining reserves, as the product—wood pulp—is extracted over time.

60,000

50,000

40,000

30,000

20,000

0 1 2 3

DEPLETION

X UNITS EXTRACTED = EXPENSE ($)

COST − SALVAGE VALUE

TOTAL UNITS

$10,000,000 − $1,000,00060,000 X 6,000 = $900,000

NUMBER

OF TREES

$^10

MILLION

$9.1

MILLION $

8.2

MILLION

$7.3

MILLION

$21,000

$18,000

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