Amortization

Definition

Amortization is the process of gradually writing off the initial cost of an asset over a set period. It is often used in accounting to allocate the cost of intangible assets such as patents or goodwill.

5 Must Know Facts For Your Next Test

1. Amortization involves spreading out expenses for intangible assets over their useful life.
2. Unlike depreciation, which applies to tangible assets, amortization is used for intangible assets.
3. Amortization expense appears on the income statement and reduces taxable income.
4. In finance, amortization can also refer to the repayment schedule of loan principal over time.
5. The straight-line method is commonly used for amortizing intangible assets.

Review Questions

• What types of assets are subject to amortization?
• How does amortization affect a company's financial statements?
• What is the difference between amortization and depreciation?

Related terms

Depreciation: The process of allocating the cost of tangible fixed assets over their useful lives.

Intangible Assets: Non-physical assets such as patents, trademarks, and goodwill that have value to a business.

Straight-Line Method: A method of calculating amortization or depreciation by evenly spreading the cost over its useful life.