What is Amortization?

Amortization

Reduction in the value of an intangible asset by prorating its cost over a period of time (generally in multiple accounting periods) is called Amortization. Point worth remembering is that it can only be done for intangible assets such as copyrights, patents, trademarks, goodwill, etc. Amortization refers to intangible assets whereas depreciation is for tangible assets.

If related to obligations, it can also mean payment of any debt in regular installments over a period of time. Home and other loans often talk about such amortization schedules.

 

Example

Let us suppose that a company Unreal Pvt Ltd. develops new software and gets a copyright for 30,000,000 and it is expected to last for 3 years.

Now, if the company shows entire 30,000,000 as an expense, it will not show the true and fair picture for that accounting period and the profits for that year will show deflated numbers. Hence, every year the company shall record 10,000,000 for 3 years to write off the copyright’s entire cost, 10,00,000 X 3 Years

This will be seen as amortization of the copyright, i.e. writing off the entire copyright’s amount in 3 years over 3 equal installments of 10,00,000 each.

 

>Read Intangible Assets Vs Tangible Assets