Definition of amortization in Accounting

Definition of amortization in Accounting

amortizing intangible assets

This is the total payment amount less the amount of interest expense for this period. As the outstanding loan balance decreases over time, less interest will be charged, so the value of this column should increase over time. For example, a fixed asset is used for a period after which it is replaced or sold. The cost of the fixed asset is then prorated over the expected life, with some portion annually expensed and deducted from its book value. Two scenarios are described by the term “amortization.” First, amortization is used in repaying debt over time with consistent principal and interest payments.

How does one amortize intangible assets?

Intangible assets are often amortized over time rather than all at once depending on the life of the asset. Amortization is a non cash expense that reduces the book value of intangible assets and is therefore, reflected on a company’s Financial Statements as a reduction to equity or net income.

This gives a greater credit to the company in the earlier years of the asset’s life. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price. Amortization of intangible assets can be used for two purposes, the first for accounting purposes and the second for tax deferment purposes. This is because the costs incurred for intangible assets are not always direct. To avoid the missing cost record being perceived as fraud, amortization values must be formally recorded.


The amortization amount is equal to the difference between the intangible asset cost and the asset residual value. Intangibles are amortized over time as per the GAAP matching principle, which links the asset’s cost to the revenues it generates. The process of value reduction for a debt or an intangible asset is known as amortization.

  • In the context of loan repayment, amortization schedules provide clarity into what portion of a loan payment consists of interest versus principal.
  • Amortization and depreciation are two methods of calculating the value for business assets over time.
  • Companies use depreciation to amortize fixed assets over their usable life.
  • Both methods appear very similar but are philosophically different.
  • But, the important point is amortization expenses must be carried out to gain clarity over expenses.

The value ‘P’ represents the period in months when you repay the loan. Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes. Is determined by dividing the asset’s initial cost by its useful life, or the amount of time it is reasonable to consider the asset useful before needing to be replaced.

Amortization for Tax Purposes

During any accounting exercise, you must evaluate the values of these assets — every year. It can be your brand value, R&D inventions, business secrets, or intellectual properties you own. There are some limited exceptions to this rule that allow privately held businesses to amortize goodwill over a 10 year period. An amortization table provides you with the principal and interest of each payment.

What accounts are amortized?

Amortization is mostly used for intangible assets, i.e. assets that aren't physical, such as trademarks, trade names, copyright, and so on. Depreciation, by contrast, is used for fixed assets, otherwise known as tangible assets.

In this case, the remaining cost, which is $ 10,000, which is unamortized, is to be expensed together, and the patent value is reduced to $ 0 on the firm’s balance sheet. Intangible Assets Of A FirmIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. Generally, an intangible asset like a copyright is amortized via the straight-line method. There is a mathematical formula to calculate amortization in accounting to add to the projected expenses. Amortization in accounting is the process of expensing an asset’s value over the period of its useful life in your balance sheet.

Step 3: Use the Amortization Schedule Formula

Depreciation is the expensing of a fixed asset over its useful life. Some examples of fixed or tangible assets that are commonly depreciated include buildings, equipment, office furniture, vehicles, and machinery. If you pay $1,000 of the principal every year, $1,000 of the loan has amortized each year.

Businesses also use another method of depreciation called the accelerated depreciation method. In this depreciation method, the company depreciates the asset faster than the traditional method, such as the straight-line method. To ensure the books are balanced, the business must also record a $100,000 amortization expense for the next ten years. Those with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever one is shorter. Company X would recognize an intangible asset valued at $17,000 and amortize that cost over 17 years.

What is Depreciation?

Retailers that own facilities generally view them as long-term investments and amortize them over thirty to fifty years. Prop houses and studios could amortize this cost by leasing the equipment out to other productions. INVESTMENT BANKING RESOURCESLearn the foundation of Investment banking, financial modeling, valuations and more.

amortized cost