I just noticed that many people confuse depreciation with amortization, and this is quite important if you work in finance or business planning. Let's see what depreciation really is.

Regarding depreciation, it is the process where accountants deduct the cost of assets that a company uses. Think simply: if your company buys a car for 100,000 baht with an estimated useful life of about 5 years, then the company should record depreciation of approximately 20,000 baht per year to cover the full 5 years.

There are two perspectives that help better understand depreciation. First, the value of the asset decreases over time. Second, it spreads the cost of an expensive asset over the years of use. The key is knowing the estimated useful life of the asset, such as a laptop typically lasting about 5 years, while machinery might last longer.

Not all assets can be depreciated. It must be your own asset, used in business to generate income, and have a lifespan of more than one year. Assets that can be depreciated include cars, buildings, office equipment, computers, machinery, and even intangible assets like patents, copyrights, and software. However, land, savings, stocks, and personal property cannot be depreciated.

Talking about methods of calculating depreciation, there are several. The first is the straight-line method, which is the simplest. You just divide the value equally each year. It’s suitable for small businesses. The advantage is ease of use, but the downside is it doesn’t account for rapid loss of value in the early years.

The second method is double declining balance, which allows you to write off more in the early years and less later. This is good if you want to recover the asset’s value quickly because it provides higher tax deductions in the initial years.

The third method is declining balance, an accelerated method where depreciation is higher at the start and gradually decreases over time.

The last method is units of production, which calculates depreciation based on how much the asset is used, such as hours of machine operation. This is accurate but more difficult to track and forecast.

Now, let’s talk about amortization. It’s similar to depreciation but applies to intangible assets like copyrights, patents, or loans. For example, if you have a patent worth 10,000 baht with a 10-year lifespan, you should amortize 1,000 baht per year.

Regarding loans, amortization means paying in installments, with each installment including interest and principal. Initially, you pay more interest than principal, but over time, the proportion shifts—you pay more principal and less interest.

The main difference between depreciation and amortization is that depreciation applies to tangible assets, while amortization applies to intangible assets. Depreciation has various calculation methods, whereas amortization typically uses the straight-line method only.

Understanding depreciation and amortization helps you analyze a company's finances better, whether for investment or planning income. They are essential tools in accounting and financial analysis.