Writing for Technical and Non-Technical Readers

This assignment was to explain the difference between depreciation, amortization, and depletion.  The first version is geared towards someone without an accounting background.  The second version is for technical accounting readers.

Version #1:

The terms depreciation, amortization, and depletion all describe a method of allocating the cost of operational assets to match the expense period in which it is incurred.  However, they differ in the method of calculation as well as the operational asset being considered.  Depreciation refers to the cost allocation of tangible assets, while amortization is used for intangible assets, and depletion is for natural resources.

Depreciation is determined by subtracting the residual value from the historical cost then dividing by the estimated useful life.  Under the straight-line method, the same amount of depreciation is incurred each year.  While the straight-line method is most commonly used and is required under GAAP, other methods of depreciation include the sum-of-the-years’-digits method, double-declining-balance (DDB) method, and activity-based depreciation.

Intangible operational assets are subject to amortization.  Like depreciation, it is necessary to determine the useful life and residual value of the asset and whether it is a period or product cost.  Items subject to amortization include bonds and patents.  However, some intangible assets are not subject to amortization like trademarks and goodwill.  This occurs because the useful life of the intangible asset is indefinite.

The final cost allocation method is depletion.  Since the depletion of natural resources is directly tied to its extraction, it is usually calculated on an activity basis.  Depreciation and amortization of assets used to withdraw natural resources are often also calculated using the units-of-production method (Spiceland, Sepe and Tomassini, 504-516).

Version #2:

In accounting, it is sometimes necessary to decrease the value of certain items over time.  For instance, a machine used in a factory will be worth less in the future than it was when it was purchased.  Rather than incur a large loss all at once, accountants use a method of reducing the value over time.  In this example, it is called depreciation.  Depreciation is the method of deducting value from a tangible item, such as machinery or other equipment, over time. 

To determine the depreciation rate, one must estimate the amount of time they believe the object will be valuable to the company.  This is referred to as the estimated useful life.  One must also assess the value it will be worth at the end of its useful life, also known as the salvage value.  In order to determine a year’s worth of depreciation, an accountant subtracts the salvage value from the original price of the item then divides it by the estimated useful life.  As the years accumulate, the depreciation is summed together into an account called accumulated depreciation.  This amount is subtracted from the original value of the item to determine the current value.

While depreciation is used to reduce the value of a tangible item, accountants use separate terms for other instances.  Amortization follows the same idea as depreciation, except it applies to intangible items such as bonds and trademarks.  Amortization is calculated in a way very similar to depreciation.  Accountants also use a term called depletion to describe the extraction of natural resources like oil from a source.  Though the calculation of depletion differs from depreciation and amortization, the fundamental idea is the same.  The terms depreciation, amortization, and depletion all describe a gradual decline in value but they vary in the nature of the item.