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Accounting charges that allocate the cost of certain long-lived tangible or intangible assets across the periods they are used.
Save conceptDepreciation and amortization spread the cost of certain assets across the periods that benefit from them. Depreciation generally concerns tangible assets such as equipment. Asset amortization generally concerns intangible assets with finite useful lives. The charges help an income statement recognise the cost of using long-lived resources rather than treating every purchase as a single period’s running expense.
The company estimates an asset’s useful life and applies the relevant accounting method and assumptions. Under a simple straight-line method, an equal portion of the depreciable or amortizable cost is recognised each period. The method, residual value and useful life affect the charge. These expenses can reduce accounting profit without representing a new cash payment for that asset in the same period.
Imagine a hypothetical machine costs J$200,000, has no residual value and is used over four years under straight-line depreciation. The annual charge is J$50,000. A finite-life software right costing J$100,000 over five years would similarly have a J$20,000 annual amortization charge under these simplified assumptions. The example does not prescribe a real company’s asset lives or accounting policy.
Excluding these charges in does not remove the original spending or the eventual need to replace equipment. and therefore measure different aspects of performance. “Amortization” can also refer to paying down a loan over time; that debt meaning is different from allocating an intangible asset’s cost. The surrounding financial context must establish which meaning applies.
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