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  • What is the difference between amortization and depreciation?

Most lenders and credit analysts learn early on to add back depreciation to determine the cash flow available to pay debt and the owners. Shortly thereafter, you learn that amortization is treated in the same way. But the real secret sauce is when you develop the understanding of what difference amortization, versus depreciation, makes in your understanding of the business.

The Definition of Amortization

The short answer: While depreciation is the bookkeeping write-off of tangible items, like buildings and equipment, amortization is the bookkeeping write-off of intangible items, like patents, customer lists, and intellectual property.

Let’s take this a bit further. If you know the definition, do you also know what difference it makes? And what it means if there are intangible assets that are not amortized…or are fully amortized. Let’s walk through an example:

  1. An insurance company buys the ‘book of business’ of another company, also called the customer list.
  2. A customer list will get stale if not pursued.
  3. Customers will go elsewhere if they do not get good service.
  4. So you might think the customer list is only good for a year or two. If that customer is still with the company, the company has probably earned that continuing business.
  5. The IRS rule for amortizing a customer list is 15 years. YIKES! So the amount of the asset amortized on the tax return may not represent the degrading of the intangible asset.

More on Amortization (and why you should care)

For more on amortization and how it helps you understand your business borrower, check out our blog post on Amortization in Tax Return Cashflow Analysis. It covers how to use the information on the tax return balance sheet to understand the impact of the intangible asset on the borrower’s business. And why you should care.

More on Tax Return Analysis

Or head over to Lenders Online Training where we turn numbers from tax returns and financial statements into actionable insights so you can say ‘yes’ to more good loans.

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Linda Keith, CPA


Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.

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