I just read about accounts and the amounts that need to be deducted in the annual budget. As I understand it, depreciation is the process where accountants deduct the cost of business assets as expenses over each year, instead of deducting the entire amount at once.

Just thinking aloud, if a company buys a laptop computer for 100,000 baht and expects to use it for about 5 years, it shouldn't deduct the full 100,000 baht in the first year, right? Instead, depreciation is dividing that amount into 20,000 baht per year to match the actual usage period.

Assets that can be depreciated are mostly tangible items, such as vehicles, buildings, machinery, furniture, and office equipment. But some intangible assets can also be depreciated, like patents and copyrights. Land, however, cannot be depreciated because its value does not decrease over time.

There are several methods to calculate depreciation, and choosing the appropriate one depends on your business. The straight-line method is the simplest because it deducts the same amount every year. It’s suitable for small businesses that prefer simplicity. But if a business wants to maximize deductions in the first year for tax relief, it might use the double declining balance method instead.

Another method is units of production, which calculates depreciation based on actual usage, such as hours operated or units produced. This method is good for businesses with equipment that has varying usage each year.

The amortization expense is slightly different. It applies to intangible assets like copyrights, patents, and trademarks. Amortization usually uses the straight-line method. Unlike depreciation, which has multiple methods, amortization typically deducts a fixed amount each period. For example, if you borrow 10,000 baht and plan to repay about 2,000 baht of principal annually, the amortization expense would be 2,000 baht per year according to the repayment schedule.

An interesting point is that depreciation is part of the calculation of EBIT, which is earnings before interest and taxes. When comparing companies in the same industry, those with more fixed assets might have lower EBIT because of higher depreciation expenses. EBITDA adds back depreciation to show the true earnings before these expenses are deducted.

Understanding the difference between depreciation and amortization helps business owners read financial statements more accurately and allows investors to compare companies fairly.