Amortization

What is Amortization

Amortization is an accounting method used to spread the cost over a period of time. It sounds complicated, but it is actually all around us. For example, the installment plan offered by Apple is a type of amortized loan. Many fashion brands nowadays also accept an installment plan. Besides daily purchases, amortization is also a common approach applied by public companies, following the GAAP. GAAP stands for “generally accepted accounting principles”. It is a set of rules used by most accountants.

Intangible Assets

When it comes to the amortization of intangible assets, it works similar to Depreciation, which is another commonly used accounting method. However, depreciation accounts for tangible assets, whereas amortization spreads the expenses of an intangible asset, such as copyrights and patents, across the “life” of this intangible asset. For public companies, amortization is a legal way to both reduce the tax for that piece of intangible asset and can also help increase its profit.

You might be wondering why amortization is beneficial for public companies. By appropriately amortizing the costs of intangible assets, there will be less tax associated with the company’s operations, which will increase the profitability of the firm.