amortization expense definition
BREAKING DOWN 'Amortization'. Amortization is similar to depreciation, which is used for tangible assets, and to depletion, which is used for natural resources. When businesses amortize expenses, it helps tie the cost of the asset with the revenues it generates. Amortization of Intangible Assets. To illustrate the amortization of an intangible asset, imagine XYZ Biotech spends $30 million dollars on a patent with a useful life of 15 years. Theoretically, to account for the expense over a 15-year period, XYZ Biotech records $2 million each year as an amortization expense. Generally, your deduction for investment interest expense is limited to your net investment income. You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. The interest carried over is treated as investment interest paid or accrued in that next year. If you use the cash method of accounting, you must pay the interest before you can deduct it. If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. For an exception, see Unpaid expenses owed to related party , later in this chapter. Example. Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time for example with a mortgage or a car loan. Amortization is recorded in the financial statements of an entity as a reduction in the carrying value of the intangible asset in the balance sheet and as an expense in the income statement. Surplus revenues enabled the amortization of its debt; and by 1852 the revenue exceeded three million dollars annually. Railroads: Rates and Regulations William Z. Ripley. 'amortization' is the word, Colonel, was Smith's prompt verdict after he had gone over Martin's summaries. where: P is the principal amount borrowed, A is the periodic amortization payment, r is the periodic interest rate divided by 100 (nominal annual interest rate also divided by 12 in case of monthly installments), and n is the total number of payments (for a 30-year loan with monthly payments n = 30 × 12 = 360). amortization in Culture Expand. amortization [(am-uhr-tuh-zay-shuhn, uh-mawr-tuh-zay-shuhn)] A term that refers either to the gradual paying off of a debt in regular installments over a period of time or to the depreciation of the “book value” (that is, the standard assessed value) of an asset over a period of time. In business, amortization refers to spreading payments over multiple periods. The term is used for two separate processes: amortization of loans and assets. It also refers to allocating the cost of an intangible asset over a period of time. 1 Amortization of loans.
Recorded in the financial statements of an entity as a reduction in the carrying value of the intangible asset in the balance sheet and as an expense in the income statement.