Amortization vs Depletion – Difference and Comparison

What is Amortization?

Amortization can be defined as the process of allocating the cost in non-substantial types of assets. These assets include the utilization of units that cannot be expressed in real terms. These include documents of loan or debt which are vital for the organization.

In this process, banks tend to lower the mortgage rates and debts interest on intangible sources. This type of activity is mostly used by money lending organizations or loan-giving companies. This type of process benefits their capital structure and profit framework.

Amortization is also useful in paying off debts with lower rates of interest. This means that the debt that was taken in the past can be paid back with the new reduced rate by lowering the overall value. This helps the money lending or loan giving organization to reap advantage from the activity.

Amortization is also significant in determining the future of the company or the asset. This means that companies that practice a good tactic of amortization tend to have a brighter financial future.

What is Depletion?

Depletion is the process of reducing the overall net worth of substantial resources to regulate its usage life. This is done to ensure the complete extraction and utilization of these assets. The resources used are natural and fossil fuels.

Depletion is also characterized by the strategic evaluation of decrementing rates. This implies only when the complete benefits are extracted, the price of these resources will comply with the company budget. This is an innovative method of allocating and reducing the cost in longer periods.

For computing the value of depletion, the organization needs to follow a typical method. This method or formula is dividing the net value of operation by the overall extraction percentage of the resources. It is important to include resources that are exhaustible and can deplete by themselves over time.

This technique is critical for companies that are into mining or extraction of natural resources. These methods are directly proportional to their profit percentage and their annual capital. However, this depleting formula must be applied following the financial guidelines.

Difference Between Amortization and Depletion

  1. Amortization is the process of cost allocation to non-substantial assets whereas Depletion is the process of cost management or reduction of substantial assets.
  2. Amortization is an important financial process for loan giving or money lending type of organizations whereas Depletion is a vital financial process for mining and fossil fuel type of organization.
  3. Amortization takes several months or years to complete while Depletion depends on the natural age of fossil fuels.
  4. Amortization has a formula of net cost divided by the utilization of non-substantial assets whereas Depletion has the formula of net cost divided by the substantial asset utilization.
  5. Amortization is an effective cost allocation method in companies or organizations whereas Depletion is the overall reduction in the cost that leads to cost management.

Comparison Between Amortization and Depletion

Parameters of ComparisonAmortizationDepletion
DefinitionReduction or allocation of cost in assets throughout their usage cycleDepletion or reduction in the total value of assets after their complete extraction
TypeMostly unsubstantial assets are used in AmortizationSubstantial assets are used in Depletion
Use in fieldField usage in loan giving or money lending organizationsField usage in extraction or mining type of organizations
MethodNet cost of assets divided by their utilizationNet cost divided by the total units for the extraction
PeriodAmortization can depend on months or yearDepletion depends on the age of fossil fuels or natural resources