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Natalia Alva

Where is Amortization shown in financial statements?

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1 Answer

  1. This answer was edited.

    What is Amortization?

    Amortization can be referred to as the depreciation of intangible assets such as goodwill, patent, trademarks, copyrights, computer software, etc. It is the reduction in the value of intangible assets over a period of time.

    Intangible assets having definite useful life lose their value over time due to technological changes, contract expirations, etc. So, finite-life intangible assets are amortized on a straight-line basis over the period of their estimated useful lives.

    Journal Entry

    The journal entry for charging amortization expenses in the books of accounts is as follows-

    Amortization Expense A/cDebitDebit the increase in expenses
     To Intangible Assets/Accumulated Amortization Expenses A/cCreditCredit the decrease in assets

    Treatment in the Financial Statements

    Amortization expenses are shown in both the Balance Sheet and Profit and Loss account.

    Financial StatementTreatment
    Profit and Loss accountPresented as Depreciation and Amortization Expenses under the head Expenses
    Balance SheetReduced from the respective Intangible Assets under the head “Non-Current assets”

    Let me also help you understand the same with the help of an example.

    Example

    Suppose Infosys Inc. acquired a new computer software for 1,000,000 in the month of January 20×1. The estimated useful life of the software is 5 years.

    In this case, computer software worth 1,000,000 will be recorded as an intangible asset at the time of acquiring the software.

    However, it will be amortized at the end of each year for 5 years on a straight-line basis ie. 200,000 will be recorded as an expense and will be written-off from the amount of software each year for 5 consecutive years.

    An extract of Profit & Loss A/c and Balance Sheet has been attached for a better understanding of the presentation of amortization expenses.

    Amortization presented in P&L A/c

    The above profit & loss extract shows 200,000 has been recorded as amortization expenses for the period Jan-Dec 20×1.

    Amortization presented in balance sheet

    The above balance sheet extract shows 200,000 amortization expenses written-off from the amount of computer software for the period Jan-Dec 20×1. The balance of 800,000 will be proportionately written-off in the next 4 years.

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