In accounting, amortization refers to expensing the acquisition cost minus the residual value of

intangible asset An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. This is in contrast to physical assets (machinery, buildings, etc.) and fin ...

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 of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...

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

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 In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to ope ...

and paying off the cost through amortization, having the effect of improving the company's net income 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 Partnersh ...

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 f ...

, 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.

References

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

See also

References