You'll often hear the words depreciation and amortization used together.

If you've watched the video on depreciation and amortization, this might even include the depreciation on some of the physical assets they've bought, or maybe the amortization on the rights to the name Super Pizzeria.

Amortization is the exact same thing as depreciation, but it applies to things that aren't equipment.

Amortization is intangible.

Depreciation is tangible.

So we have this depreciation value. This is the truck depreciation.

This is the principal amortization.

But that's all amortization is.

That's what depreciation does.

amortization. Amortization is to spread out a non tangible cost over a period of time.

So it would be patent amortization.

Well, you know depreciation, man.

Instead of retooling I'll call that depreciation.

And if we did our depreciation schedule right, or if the

And then we have depreciation, and we want to think a little bit in this video, what does the depreciation do to the cash flow statement?

We'll talk later about amortization schedules and how can you pay down the debt.

Does depreciation of the yen give rise to inflation?

This is all a review of the depreciation video.

Really, in my mind, it's very similar to depreciation.

And we'll talk later about depreciation and amortization and how we might change what these values are, but a very simple way is, if you went out and bought 10 million worth of stuff, you'd write on your books, I have a 10 million asset.

So the depreciation in each of these periods is 20,000.

Amortization is the exact same thing, but it deals with intangible assets.

So instead of putting 500,000 there, the depreciation is minus 250,000.

And then the other 250,000 essentially went to an expense called depreciation, which is right there.

So essentially, a 30 year fixed rate loan has a 30 year principal amortization.

I don't think we took any depreciation on that new equipment last year.

But then we use that airliner ten thousand times during it's amortization life, at least.

And then instead of having an equipment expense, instead of having that expense, they'll have an equipment depreciation expense.

And let's say we do a straight line depreciation, which means we essentially depreciate the asset evenly over its lifespan.

It would be minus 12,500 in each year, depreciation expense, and we would account for it on the balance sheet.

So patent amortization would be 1,000 in this year, 1,000 in this year, 1,000 in this year, and 1,000 in this year.

They have no money down, 1 million loan, subprime, negative amortization, they had no credit rating, etc, etc.

So for example, depreciation, this was factory equipment, and it gets old as I use it, so I spread out its cost.

You add the profit to the depreciation, you get a 50,000 operating profit same as the previous year.

And amortizing really just means spreading out the cost of this asset, just like depreciation was spreading out the cost of a physical asset.

We want to add back this depreciation to the profit so our cash from operations is going to be 50,000.

So in any of these periods, the depreciation expense should be added back to the operating profit, to figure out the cash from operations.

So hopefully that gives you a sense of why we add back depreciation when we figure out the cash from operations and how it works out in our cashflow statement.

The fact that this machine right here that cost 50,000 is used for in this example, in the depreciation video, it was usable for two years.

And this is just an arguably long winded way of saying that the way you account for this is you spread out the cost over time, over its useful life, and this spreading out is called the depreciation of an asset.

leading to a different continuous amortization of x, y, and theta, but because in A we tend to expand cells along the shortest path before we look at the longer paths, we now just cut this off and never consider the state over here again.

So in our previous examples we've done depreciation so you can imagine, in period 0 we buy a truck for 60,000 and instead of just expensing it in period 0, instead of putting 60,000 expense right over here, we capitalize it.

So principal amortization just means, well, if I just keep paying this mortgage, after how long is the entire principal amount not just interest, how long is the entire principal amount going to be paid off in?

In the depreciation video, we saw that if a company had to buy some equipment for its factory, let's say at the beginning of 2007, just based on the cash that went out of the door, there might have been this temptation to say,

And horses and pigs and goats and sheep and...