Depreciation vs amortization applies to which types of assets?

• A. Depreciation applies to tangible assets; Amortization applies to intangible assets.
• B. Depreciation applies to intangible assets; Amortization applies to tangible assets.
• C. Both depreciation and amortization apply to all assets.
• D. Neither depreciation nor amortization affects the income statement.

Answer: (A)

Depreciation vs amortization divides how the cost of assets is allocated over time. Depreciation is used for tangible, physical assets like buildings, machinery, and vehicles. Amortization is used for intangible assets such as patents, licenses, trademarks, and other non-physical assets with finite useful lives. Indefinite-life intangibles aren’t amortized; they’re tested for impairment instead. Both methods reduce reported earnings as expenses and gradually reduce the asset’s book value on the balance sheet through accumulated depreciation or amortization.