Amortization
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. It 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. But over time, as you amortize these assets, the amortized amount accumulates in a contra-asset account. Therefore, it diminishes the net value of the intangible assets. The periodic amortization amounts are expensed on the income statement as incurred. Whereas on the cash flow statement, these expenses are added back to net income in the operating section. This is because they represent non-cash expenses.

Intangible Asset Amortization

Examples of intangible assets that a company may amortize include the following:

Depending on the circumstances, some brand names or goodwill items may not decrease in value over time. Therefore, you may not amortize them.

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. Spread out the amortized loan and pay it down based on an amortization schedule or table. There are different types of this schedule, such as straight line, declining balance, annuity, and increasing balance amortization tables. Amortizing mortgages is common.
If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.
amortization
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
amortization
See Also:
Straight-Line Depreciation
Accelerated Method of Depreciation
Double Declining Method of Depreciation
Goodwill Accounting Term

ARTICLES YOU MIGHT LIKE

The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »

CPA’s are Specialized

The Difference in CPAs Looking back at my career I don’t know how many times I have introduced myself to someone and they ask, “Are you a CPA?” and I say yes. Then they tell me “you must be very busy with tax season” and I look at them with a bit of awe and

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

September 12-15th 2022

Days
Hours
Min
SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ WORKSHOP SERIES

Strategic CFO™ Financial Leadership Workshop
The Art Of The CFO®

Days
Hours
Min

February 27 - March 2, 2023

Skip to content