Amortisation
Amortization is the process of spreading the cost of an intangible asset over its useful life. It is used to reduce the cost of the asset over time, rather than expensing it all at once.
Here is a breakdown of the key points:
What is amortized:* Intangible assets, such as patents, copyrights, or trademarks* Loans* Lease payments
Time period:* Over the useful life of the asset* Usually over several years
Method:* Straight-line method * Units-of-production method* Sum-of-the-years-digits method
Purpose:* To match expense with revenue over the useful life of the asset* To provide a consistent pattern of depreciation expense
Example:A company pays $10,000 for a patent. The patent has a useful life of 10 years. The company will amortize the cost of the patent over the 10 years, using the straight-line method. This will result in annual depreciation expense of $1,000.
Here are some additional points to remember:
- Amortization is not used for tangible assets, such as equipment or buildings.
- The cost of an asset is capitalized and then amortized over its useful life.
- Amortization expense is recorded in the period in which it is incurred.
- The accumulated amortization expense is used to reduce the cost of the asset in the period.
If you have any further questions about amortization, please feel free to ask.
