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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.
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.
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