Would you like to understand depreciation more deeply? Let’s see how important this is to business.

Depreciation is the accounting method used to record the loss of value of an asset over time. For example, imagine a company buys a car for 100,000 baht and expects it to last for 5 years. Each year, that car will lose value. Depreciation helps the accounting records allocate this cost evenly over the 5 years—about 20,000 baht per year.

Why is depreciation needed? If it didn’t exist, the company would appear to suffer significant losses in the first year, making the financial picture unclear. Depreciation smooths out this effect and reflects reality more accurately.

Another important thing to know is that depreciation is included in the calculation of EBIT, which stands for earnings before interest and taxes. This affects the comparison of companies in the same industry. If one company has more fixed assets, its depreciation will be higher, resulting in a lower EBIT.

But if you look at EBITDA, which includes interest, taxes, depreciation, and amortization, and add them back, the numbers are different. EBITDA helps show a company’s true earning power without being impacted by the choice of accounting methods.

Assets that can be depreciated must be assets you own, used in the business, have an estimated useful life, and are expected to last more than 1 year. Examples include cars, buildings, furniture, computers, machinery, software, patents, and copyrights—these can all be depreciated.

However, assets that cannot be depreciated include land, collectibles (art, coins), stocks and bonds, personal property, or assets used for less than 1 year.

Let’s look at how to calculate depreciation—there are 4 main methods.

The first method is the Straight-line method, or the straight-line method. This is the simplest approach: divide the cost evenly across each year. The advantage is that it’s easy to calculate and has fewer chances of errors. The downside is that it doesn’t account for the fact that assets tend to lose value faster in the early years, and maintenance costs will increase as the asset gets older.

The second method is the Double-declining balance, or the declining-by-two method. This method accelerates depreciation, recording a much larger depreciation expense in the first few years and then gradually decreasing over time. It’s good for businesses that want to recover costs quickly and increase cash flow. Its advantages include helping offset increasing maintenance costs and enabling the maximum tax deductions in the first few years.

The third method is the Declining balance method. This is an accelerated method that depreciates assets faster than the straight-line method—up to twice as fast—resulting in higher expenses in the first year and then gradually decreasing.

The fourth method is Units of production. Depreciation is calculated based on actual usage, such as the number of hours used or the products produced. It’s suitable for machinery. The advantage is that it’s accurate according to actual usage, but the downside is that it’s difficult to track and calculate.

Now let’s talk about Amortization, orค่าตัดจำหน่าย. It’s similar to depreciation, but it applies to intangible assets, such as copyrights, patents, and trademarks.

Amortization is also used for loan repayments. For example, if you borrow 10,000 baht and repay 2,000 baht each year, the amortization expense is 2,000 baht per year. For instance, a machinery patent costing 10,000 baht with a useful life of 10 years would have an amortization expense of 1,000 baht per year.

The difference between depreciation and amortization is that depreciation applies to tangible assets (physical assets that can be touched), while amortization applies to intangible assets (non-physical assets that cannot be touched). Depreciation has several calculation methods, but amortization uses only the straight-line method.

In summary, depreciation and amortization are important tools for financial analysis. They help give a clearer picture—whether you’re a business owner, an accountant, or an investor. Understanding how depreciation and amortization are calculated will help you make better decisions.