Amortisation, a fundamental concept in accounting, entails gradually reducing the recorded cost of an intangible asset over its anticipated period of utilisation, commonly referred to as its useful life. This process effectively transfers the asset from the balance sheet to the income statement.
Intangible assets, which include patents, trademarks, licenses, copyrights, lease agreements, customer lists, and internet domain names, are non-physical assets acquired externally rather than developed internally. These assets are expected to generate benefits for at least one accounting period. It’s important to note that if an intangible asset is determined to have an indefinite life, it is not subject to amortisation. Due to their non-physical nature, intangible assets are typically not easily convertible into cash and therefore cannot be utilised as collateral for loans.
Amortisation represents a non-cash expense, involving the systematic allocation of an asset’s cost (i.e., the expenditure incurred to acquire the asset) to expenses over its useful life. In practical terms, amortisation is recorded as a debit to the amortisation expense account and a credit to the accumulated amortisation account.
On the income statement, the amortisation expense is typically included within the “depreciation and amortisation” line item. On the balance sheet, the accumulated amortisation account serves as a contra account, appearing after the intangible assets line item. In some instances, it may be consolidated with the accumulated depreciation line, reflecting only the net balance. Various methods exist for calculating amortisation, including the straight-line method, declining balance method, double declining balance method, bullet method, and balloon payments.
It’s worth noting that the methods used for depreciation, such as straight-line, declining balance, and double declining balance, can also be applied to amortisation when evaluating advances and loans. In such cases, the methods employed for loan amortisation schedules are utilised.