Software Depreciation vs. Amortization: Which Applies?
"Software depreciation" is a common phrase, but capitalized software is amortized, not depreciated. The difference between the two, and which one applies to software.
People search for “software depreciation,” but capitalized software is almost always amortized, not depreciated. The two describe the same idea — spreading an asset’s cost over the years it’s useful — but they apply to different kinds of assets, and software is the intangible kind.
Depreciation vs. amortization
| Depreciation | Amortization | |
|---|---|---|
| Applies to | Tangible assets (PP&E) | Intangible assets |
| Examples | Machines, vehicles, buildings | Software, patents, licenses |
| The mechanic | Cost spread over useful life | Cost spread over useful life (identical) |
Because software is an intangible asset, its capitalized cost is amortized over its useful life — typically straight-line. The journal entry debits amortization expense, not depreciation expense (see the entries).
Why people say “depreciation”
The word gets used loosely, and a few things blur it:
- In everyday use, “depreciation” stands in for any cost-spreading.
- Off-the-shelf software bundled with hardware can be depreciated as part of that fixed asset.
- Tax rules use their own schedules and terminology, which don’t always match book treatment.
For book purposes, though, the answer holds: capitalized software is amortized.
Frequently asked questions
Is software depreciated or amortized?
Amortized. Software is an intangible asset, and intangibles are amortized; depreciation applies to tangible assets like equipment and buildings.
What's the difference between depreciation and amortization?
The mechanic is the same — spreading an asset’s cost over its useful life. Depreciation applies to tangible assets; amortization applies to intangible ones like software.
How long is software amortized over?
Over its estimated useful life — commonly three to five years for internally built software, though it’s a per-system judgment.
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