Amortization (business)
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In
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
, amortization refers to expensing the acquisition cost minus the residual value of
intangible asset An intangible asset is an asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets r ...
s in a systematic manner over their estimated "useful economic lives" so as to reflect their consumption, expiry, and obsolescence, or other decline in value as a result of use or the passage of time. The term amortization can also refer to the completion of that process, as in "the amortization of the tower was expected in 1734".
Depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
is a corresponding concept for tangible assets. Methodologies for allocating amortization to each accounting period are generally the same as these for depreciation. However, many intangible assets such as goodwill or certain brands may be deemed to have an indefinite useful life and are therefore not subject to amortization (although goodwill is subjected to an impairment test every year). While theoretically amortization is used to account for the decreasing value of an
intangible asset An intangible asset is an asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets r ...
over its useful life, in practice many companies will amortize what would otherwise be one-time expenses through listing them as a capital expense on the cash flow statement and paying off the cost through amortization, having the effect of improving the company's
net income In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization ...
in the fiscal year or quarter of the expense. Wikinvest's Coverage of Amortization Amortization is recorded in the
financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
of an entity as a reduction in the carrying value of the intangible asset in the
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a busine ...
and as an expense in the
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
. Under
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fina ...
, guidance on accounting for the amortization of intangible assets is contained in IAS 38. Under United States generally accepted accounting principles (GAAP), the primary guidance is contained in FAS 142.


See also

*
Amortized analysis In computer science, amortized analysis is a method for Analysis of algorithms, analyzing a given algorithm's Computational complexity, complexity, or how much of a resource, especially time or memory, it takes to Execution (computing), execute. ...
* Annuity (finance theory) *
Depletion (accounting) Depletion is an accounting and tax concept used most often in the mining, timber, and petroleum industries. It is similar to depreciation in that it is a cost recovery system for accounting and tax reporting: "The depletion deduction" allows an o ...
* Earnings before interest, taxes, depreciation and amortization EBITDA *
Index of real estate articles This aims to be a complete list of the articles on real estate. __NOTOC__ # * 72-hour clause A * Abandonment (legal), Abandonment * Abstract of title * Acceleration (law), Acceleration clause * Accession (property law), Accession * Acknowle ...


References

{{reflist, 30em Accounting terminology Real estate Loans Intangible assets