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.

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

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.

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.

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

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

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

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 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.

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

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

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

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

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

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.

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

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

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

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.

Or... Or?

You will not cry or whine or laugh or giggle or sneeze or burp or fart!

Or? Or what?

Or... Or shop.

like wheat or soybeans or corn or rice or whatever.

Or a sausage or something? Or something?

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.