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.
Amortization of Financing Costs
Accrual based accounting requires financing costs be amortized (allocated) over the expected life of the financial instrument or loan. Amortization of financing costs is both a Generally Accepted Accounting Principle and an Internal Revenue Code requirement.