What is amortization?

Amortization is an accounting method applied to reduce the cost value of limited life or intangible asset gradually through planned expenses as against income. Depreciation is paying off a debt over tangible assets with a fixed repayment plan in regular payments over time. Amortization also refers to extending the capital expenses for intangible assets over a particular timeline, for accounting and tax purposes. Amortization can apply to pay off the debt over time first in regular parts of the asset and then payment of the principal sufficient to discharge the debt by the maturity time. On the other hand, depreciation can also mean the reduction of capital expenses over the asset’s useful life. In this scenario, amortization estimates the usage of the value on an intangible asset, such as goodwill, a license or copyright. Amortization is used for intangible assets, depletion, and natural resources. When companies amortize expenses, they help to bond an asset’s costs to the revenues it generates. For instance, with a massive asset, the industry cuts the rewards of the expenses for years. Therefore, it writes off the cost incrementally over the valuable life of that asset. In other words, a company that obtains the copyright license to a book may spread the costs of obtaining such license over the years granted in the license.

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