Every business utilizes certain assets but all products with a projected operating time ultimately reach their end. Various asset categories, including fixed, intangible, and natural goods, are progressively depreciated over the course of their useful lives. Depreciation, depletion, and amortization (D&A) is the collective name for a group of methods used to progressively apply some costs to expenses over a protracted amount of time. These charges play an essential role when it comes to financial statements.
Depreciation is the intended, progressive decline in the reported value of a tangible good throughout its operating time. Depreciation is used to stretch out expenditure reporting for fixed assets over the time that a company anticipates making a profit from such assets (Lessambo, 2018). With this accounting technique, a physical asset’s cost is spread out throughout its expected lifetime. Meanwhile, amortization implies a similar method, but it is used to describe how an intangible asset is depleted (Lessambo, 2018). In the oil and gas sector, the term amortization is applied more widely to describe the continual depreciation of assets like buildings, walls, and technology that are added to the price of the oil and gas that is extracted (Lessambo, 2018). A real physical decline of a renewable source is referred to as depletion. On the other hand, the term depletion implies a similar accrual accounting method but it is frequently employed in other businesses, such as those that produce natural resources, notably mining, oil, and the forestry industry, among others. The given charges are commonly used in the Income Statement.
Thus, depreciation, depletion, and amortization refer to charges that occur when it comes to the asset life. For example, depreciation refers to the method of stretching out the cost throughout of tangible asset’s lifespan. Meanwhile, amortization implies constant depreciation in the cost of the intangible asset. Depletion refers to the physical decline of a renewable source in natural resource businesses. These terms are often recorded in accounts, such as Income Statement.
Reference
Lessambo, F. I. (2018). Financial statements. Palgrave Macmillan, Cham.