Understand Amortization: Definition, Importance, and Calculation

amortizable

intangible assets

Amortizable is a term used to describe a type of expense or cost that can be gradually paid off or deducted over time. This is typically in reference to tangible assets, such as equipment or buildings, which have a limited lifespan and are expected to lose value over time.

When an asset is acquired, the cost of that asset is typically recorded as a fixed asset on the balance sheet. The cost of the asset is then allocated or “amortized” over the useful life of the asset. This means that each year, a portion of the cost of the asset is recognized as an expense on the income statement, and the value of the asset on the balance sheet is reduced accordingly.

For example, if a company acquired a building for $1 million and expected it to last for 20 years, it could amortize the cost of the building evenly over the 20-year period. This would result in an annual depreciation expense of $50,000 ($1 million divided by 20 years). The building’s value on the balance sheet would also decrease by $50,000 each year, reflecting the portion of the asset that has been “used up” over that time period.

By amortizing the cost of an asset over its useful life, a business is able to accurately reflect the true cost of the asset on its financial statements over time. This can be important for tax purposes, as well as for tracking the financial health of the business.

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