When a business acquires a loan there are typically closing costs involved. Generally Accepted Accounting Principles (GAAP) require these financing costs to be amortized (allocated) over the life of the loan. There are several principles the reader needs to understand to properly calculate and assign these costs to the financial statements. This lesson explains the basic business principles of amortization of financing costs, organization of information, reporting and interpretation. It is written for bookkeepers, novice accountants and small business owners. The final section is an in depth example and model to follow.
Accumulated amortization reflects the dollar value of intangible asset purchases allocated to the income statement. Accumulated amortization is an account on the balance sheet used as an offset against amortizable assets. It equals the lifetime amount deducted via the profit & loss statement. In general is it seen as a netted amount against the total amortizable assets.
Tangible and intangible are terms with several different meanings. A lot of well educated folks have a difficult time providing an all inclusive definition. Someone once described tangible as ‘something that can be burned’. Well, land is tangible and yet, you can’t burn it. Actually, in Boy Scouts, we teach the boys to use dirt to put out fires! But the best overall definition for these terms that I heard was a synonymous statement made by a Supreme Court Justice when trying to define pornography in relation to art. He said something along the line of ‘I don’t have a definition, but I just know it when I see it’. Basically the gray area for the definition is vast. This is true for these two terms because there are various levels of definitions related to their respective use.
There is the classic college textbook definition. It is straight forward, but it doesn’t really begin to get involved in the gray area definitions. Then there is the more extended definition as used in accounting and customarily in the traditional business setting. Really getting into higher thinking and use of the terms comes into play when discussing value. Finally, there is the relationship to each other with regards to economics and the evolving concept of wealth. They are similar to the theory of the Yin and the Yang of life itself.