Just realized that Depreciation and Amortization are more complex than I thought. In fact, they are very important concepts if you understand finance.

Let's start with Depreciation first – it is the process where accountants allocate the cost of an asset over its useful life. Think of it this way: a company buys a car for 100,000 baht and expects to use it for 5 years, so it will depreciate 20,000 baht per year. Why do this? Because assets do not last forever; they gradually wear out.

Someone asked which assets can be depreciated. According to the rules, it must be owned by you, used in business, have a determinable useful life, and be expected to last more than 1 year. Examples include cars, buildings, machinery, computers, furniture, even patents and copyrights. But assets that are not depreciable include land, collectibles, stocks and bonds, and personal property.

Now, let's talk about the four main methods of calculating depreciation.

The first method is the Straight-line method – the simplest. It divides the value equally over each year. Small businesses prefer this because it's easy to calculate. But the downside is it doesn't account for assets that wear out faster in the early years.

The second method is Double-declining balance – it depreciates more in the beginning and then gradually less. It’s good for businesses that want to recover asset value quickly and can provide more tax benefits in the first year.

The third method is Declining balance – similar to the second but with different depreciation rates.

The fourth method is Units of Production – this method is based on actual usage. If a machine is used heavily today, it depreciates more today; if used less, less depreciation. It’s suitable for businesses needing high accuracy.

And what is Amortization? It is similar to depreciation but applied to intangible assets, such as copyrights, patents, or loans. For example, if you have a 10,000 baht loan paid over 10 years, the amortization expense would be 1,000 baht per year.

The main difference is that depreciation applies to tangible assets, while amortization applies to intangible assets. Depreciation has multiple methods, but amortization typically uses only the straight-line method.

This is important because it affects EBIT (Earnings Before Interest and Taxes), which is a key figure for investors. When comparing two companies—one with many fixed assets and one without—depreciation can cause EBIT figures to differ significantly.

Understanding depreciation and amortization helps us read financial statements better and make smarter investment decisions. Have you ever noticed which methods different businesses use?