Amortization:In accounting, amortization refers to the periodic expensing of the value of an intangible asset. Similar to depreciation of tangible assets, intangible assets are typically expensed over the course of the asset’s useful life. Amortization represents reduction in value of the intangible asset due to usage or obsolescence. Basically, intangible assets decrease in value over time, and amortization is the method of accounting for that decrease in value over the course of the asset’s useful life. A company’s long-term capital expenditures can also be amortized over time.
Amortization Treatment:Intangible assets are recorded on the balance sheet. Over time, as these assets are amortized, the amortized amount accumulates in a contra-asset account thereby diminishing the net value of the intangible assets. The periodic amortization amounts are expensed on the income statement as incurred. On the statement of cash flows, amortization expenses are added back to net income in the operating section because they represent non-cash expenses.
Intangible Asset Amortization:Examples of intangible assets that a company may amortize include: trademarks, patents, copyrights, brand names, goodwill, and other intellectual property. Depending on the circumstances, some brand names or goodwill items may not decrease in value over time and therefore may not be amortized.
Amortization Regulations:In International Financial Reporting Standards (IFRS), the rules and standards for intangible asset amortization are described in International Accounting Standard 38: Intangible Assets. In the United States, according to General Accepted Accounting Principles (GAAP), the rules and standards for intangible asset amortization are described in Statement of Financial Accounting Standards No. 142: Goodwill and Other Intangible Assets.
Amortization of Loans:Amortizing a loan consists of spreading out the principal and interest payments over the life of the loan. The amortized loan is spread out and paid down based on an amortization schedule or amortization table. There are different types of amortization schedule, such as straight line, declining balance, annuity, and increasing balance amortization tables. Amortization of mortgages is common.
Journal Entry For Amortization:
Amortization a/c Dr.
TO Asset(patent) a/c
Formula for Amortization:
Amortization = Cost of asset/Life of asset (Straight line method )