Amortization refers to the accounting technique which involves the distribution of the cost of any asset over a period of time. This technique is generally helpful in lowering the cost value of some kind of intangible asset which usually increments through schedule charges to income. It is the process of payments of the debt obligations with a schedule which is based on a fixed amount of repayments form time to time. These repayments are usually done in regular installments. These payments of installments are based on a fixed schedule of amortization in a given duration of time. Amortizations are known to reduce the incomes which are taxable throughout the lifespan of an asset. Theses also lead to the deduction of the expenses which are related to the capital amount over the useful life of the assets. So basically amortization is the measure of the extent to which an intangible asset has been consumed for example a patent or a good will or even a copyright.
Many times amortization is compared with the depreciation that are used for the assets which are tangible and also to those depletion’s which are commonly used for those natural resources. So when an entity (business) does the amortization of an expense they actually end up teeing the cost of the assets to the revenue that has been generated. So if for example there is a large asset, the rewards for the expenses of that particular year will be reaped of the businesses itself. Thus the expenses are written off incrementally thought the life of that asset which can be either tangible o even intangible.
Working of amortization
Now one hand where most of the assets lose their value over time, amortization lets an entity cover up for the gradual looses form the records of accounting. By simply showing the decrement in the value of an asset will automatically lead to a reduction in the taxable income. Also if there is any asset that brings in the money for over a year, one would surely want to write off its cost for a longer duration of time. Thus it is advisable to make use of the amortization so as to match the expenses of an asset in comparison to the value of the revenue that is generated every year. Also amortization is the process of making repayments of the principal amount which is in the form of loan. In this case amortization would involve the division of the loan amount t ill the time it is completely paid off. Here each payment is recorded as an expense instead of recording the entire cost of the loans at one go.
Thus amortization proves to be quite helpful in reducing those which are taxable throughout the lifespan of any intangible asset.