Which statement correctly differentiates amortization and depletion?

Which statement correctly differentiates amortization and depletion?

• A. Amortization applies to tangible assets; depletion applies to tangible assets.
• B. Amortization applies to natural resources; depletion applies to intangible assets.
• C. Amortization allocates the cost of intangible assets; depletion allocates the cost of natural resources.
• D. Amortization and depletion are methods used only for tax purposes.

Answer: (C)

The main idea is how we match cost to the period in which the asset provides value. Amortization is used for intangible assets—non-physical assets like patents, copyrights, or franchises—and it spreads their cost over the asset’s estimated useful life. Depletion is used for natural resources—tangible, physically extracted assets like oil, minerals, or timber—and it allocates cost as the resources are extracted. Because of this, the statement that amortization allocates the cost of intangible assets and depletion allocates the cost of natural resources is the best description. The other notions mix up asset types (tangible assets are usually depreciated) or misstate the purpose (these methods aren’t used only for tax).

The main idea is how we match cost to the period in which the asset provides value. Amortization is used for intangible assets—non-physical assets like patents, copyrights, or franchises—and it spreads their cost over the asset’s estimated useful life. Depletion is used for natural resources—tangible, physically extracted assets like oil, minerals, or timber—and it allocates cost as the resources are extracted. Because of this, the statement that amortization allocates the cost of intangible assets and depletion allocates the cost of natural resources is the best description. The other notions mix up asset types (tangible assets are usually depreciated) or misstate the purpose (these methods aren’t used only for tax).