Amortization is similar to depreciation whereby an asset’s cost is allocated to the expense over time. There are several differences with amortization. Amortization is used with intangible assets and the method is almost always straight line. As a bookkeeper it is your job to maintain the amortization schedules, report the information correctly and interpret the results for management.
Intangibles refers to a set of assets that are non physical in nature. Examples of these types of assets include patents, rights, copyrights, goodwill, an financing fees for a loan. Intangible types of assets are located in the bottom section of the asset side of the balance sheet and amortization is used to allocate the actual cost over time to the income statement.
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.
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.