What is the difference between amortization and depreciation?

What is the difference between amortization and depreciation Introduction: The Importance of Amortization and Depreciation Hello everyone, and welcome to today's video. When it comes to financial management, two terms that often come up are amortization and depreciation. While they might sound similar, they have distinct meanings and applications. Understanding these concepts is crucial for accurate financial reporting and decision-making. So, let's dive in and explore the differences between amortization and depreciation. Defining Amortization: The Gradual Reduction of Debt Amortization primarily deals with the gradual reduction of debt over time. It is commonly used in the context of loans, where regular payments are made to cover both the principal amount and the interest. These payments are structured in a way that ensures the debt is fully paid off by the end of the term. Amortization schedules are often created to provide a clear breakdown of each payment, showing how much goes towards interest and how much towards the principal. Understanding Depreciation: The Decline in Asset Value Depreciation, on the other hand, is related to the decline in the value of an asset over its useful life. This is particularly relevant for tangible assets like buildings, machinery, or vehicles.