What is the difference between depreciation and amortization?

In business, there are two types of assets. One depreciates, and the other amortizes:

• Current (or short-term) assets will be sold, converted to cash, or liquidated within one year. Accounts receivable and inventory are good examples of short-term assets. Most short-term assets amortize or spread their value over their useful life.
• Long-term (or fixed) assets are not intended to be turned into cash or consumed within one year. Long-term assets include computers, office furniture, building improvements, vehicles, etc. Most long-term assets slowly lose value or depreciate over their useful life.

Setting the useful life of a short-term asset

LivePlan calculates the amortization of short-term assets based on the useful life of each asset. The useful life is the time you think the asset will provide value to your business.

When you enter a current asset in your forecast, you can set the number of months (between 1 and 12) in which to spread out its value:

This setting will prompt LivePlan to amortize the asset or divide its total value by the number of months and then apply that value to each month of the asset's useful life.

If you prefer not to have the asset amortized, choose Keep at full value from the drop-down list. With this setting, LivePlan will represent the full value of the asset in each period of your plan.

Setting the useful life of a long-term asset

LivePlan calculates depreciation on long-term assets based on useful life - or the period of time you think the asset will provide value to your business.

Note that the useful life may differ from an asset's actual life. For example, a delivery van may only provide value to your business for ten years, but the van itself could last quite a bit longer than that. A variety of things can affect the useful life of an asset, including:

• How old the asset was when you purchased it
• How often do you use it
• The conditions in which you're using the asset

Useful life periods are determined by tax authorities (for example, in the U.S., the IRS). If you need to know the useful life period for a particular asset, you can find that information from the tax agency in your local area.

Here are some examples of useful life values for common long-term business assets (in the U.S.):

• Vehicles, computers, office machines, research equipment: 5 years
• Office furniture and fixtures: 7 years
• Agricultural or horticultural structures: 10 years
• Land improvements: 15 years
• Farm buildings (not agricultural or horticultural): 20 years
• Residential rental property: 27.5 years
• Non-residential real estate (not including the value of the land): 39 years

LivePlan calculates a straight-line depreciation based on the useful life you've set for your asset.

For more detailed information about calculating useful life and depreciation in the United States, see this article from the Internal Revenue Service: A Brief Overview of Depreciation. If you are not located in the U.S. or would like more detail about depreciating your long-term assets, we recommend contacting an accounting or tax expert in your area.

To set the useful life of a long-term asset, select the number of years from the pull-down menu:

If this asset doesn't depreciate, choose Forever (do not depreciate) at the bottom of the list:

Related:

• Entering asset purchases
• What is the difference between a long-term asset and a current asset?