Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time. It is the process of incrementally charging the cost of an asset to expense over its expected period of use, which shifts the asset from the balance sheet to the income statement. Amortization expenses account for the cost of long-term assets over the lifetime of their use. The term "amortization" refers to two situations:
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Paying off debt: Amortization is used in the process of paying off debt through regular principal and interest payments over time. An amortization schedule is used to reduce the current balance on a loan through installment payments.
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Accounting for assets: Amortization is used to account for the decreasing value of an intangible asset over its useful life. It is most commonly used for the gradual write-down of the cost of those intangible assets that have a specific useful life, such as patents, copyrights, taxi licenses, and trademarks. Amortization is recorded in the financial statements of an entity as a reduction in the carrying value of the intangible asset in the balance sheet and as an expense in the income statement.
Amortization is often used for tax purposes. Companies are required to amortize the costs of long-term assets over the lifetime of their use to claim the capital cost allowance. The Canada Revenue Agency requires companies to amortize the costs of long-term assets over the lifetime of their use to claim the capital cost allowance. Companies often have leeway to accelerate or defer some amortization to optimize their tax liability.
