Describe the term amortisation in finance and accounting.

Amortisation means distribution of cost of intangible asset over a periods of time. Only intangible assets (assets which don’t have physical existence) are amortised, tangible assets (assets which have physical existence) can’t be amortised.

Steps to record amortisation in a journal are as follows −

  • Identify initial value of the asset.
  • Life span of the asset.
  • Residual value.

Amortisation expenseXXXX
Accumulated amortisation

Formula to calculate is − amortisation expenses = (initial value-residual value)/lifespan

Advantages of amortisation are −

  • Reduces tax burdens.
  • Firms can show higher value of an asset.
  • Firms can show more income in financial statements.

Amortising intangible assets includes −

  • Note the starting date.
  • Calculate initial cost.
  • Estimate life span.
  • Calculate amortisation value per year.

Recording the amortisation includes −

  • Make an entry in firm balance sheet.
  • Maintain its records.
  • Never undervalue intangible assets.