"C# Basics (Retired)" was retired on June 30, 2019.
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We describe the Depreciation, Amortization and EBIT line items, and dive into the difference between depreciation and amortization.
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Depreciation and amortization
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are actually some of the more interesting
topics in accounting in my opinion.
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Think about what depreciation is.
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It's an expense that shows
the reduction in value of an asset.
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There are tons of articles, and
papers, and polices about depreciation.
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But for us, just know, it's an expense
related to an asset reducing in value.
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A company will likely depreciate different
items over different time frames.
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Maybe a computer is depreciated
over three years, but
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a piece of factory equipment
is depreciated over ten.
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It depends on the situation.
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The depreciation expense on the P and
L is the sum total of all depreciation for
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the business's assets over that period.
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Amortization is used to describe some
different things in accounting, but
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in this situation and generally speaking,
when you are saying just amortization,
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full stop, instead of saying
amortizing revenue or amortizing debt.
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Amortization usually refers to the same
thing as depreciation, except that
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depreciation is the reduction in value
of a tangible asset that you purchased.
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Amortization usually relates
to an intangible asset.
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I know, crazy, right?
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People put a value to something you
can't touch on the financial statements.
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That's a topic for another day, but I'll
just give you a few examples, real quick.
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Think about a brand like Coca-Cola,
there is a lot of value in that brand.
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It's known all over the world.
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People pay a premium for Coca-Cola
over the no name brand that is also
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available at the grocery store,
so there is value in the brand.
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Another example is something
known as goodwill in accounting.
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If I buy a business for
more than its book value, and
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the difference between the purchase price
and book value is known as goodwill.
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We'll talk about book value more
in the next stage of this course,
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so don't get stuck on what book value is.
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For now,
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just leave it as the value the financial
statements say a business is worth.
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However, businesses strategically acquire
companies at a premium regularly.
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Think about Facebook's
purchase of Instagram,
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that was a huge deal at the time.
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They paid $1 billion for Instagram,
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lots of people were going
crazy when that happened.
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But, the general consensus now is
that it was an extremely smart and
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good value acquisition.
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Anyhow, the book value of Instagram
was definitely not $1 billion
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when Facebook acquired it.
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Facebook has made a lot of
acquisitions over the years.
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And if you look at the balance sheet,
you can see at the end of 2017,
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they had over $18 billion of
goodwill on their balance sheet.
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Again, we'll come back to
that in the next stage.
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Okay, circling back to amortization,
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though, at regular intervals,
a company has to do a valuation exercise
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on their intangible assets to
see if they have gone down.
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If they have,
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then this is where the business will put
an amortization charge on their P and L.
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As I said earlier, there's a lot of detail
one could go into on the topics of DNA.
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But in the interest of time, we'll move
along to earnings before interest and
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taxes, or EBIT.
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This is another measure of profit,
similar to EBITDA, except depreciation and
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amortization have been taken off.
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There is also, surprise, surprise, an EBIT
margin metric that some folks track.
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Sometimes EBIT will be labeled as
operating income on the P and L.
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