Describe the term amortisation in finance and accounting.

Amortisation means distribution of cost of intangible asset over a periods of time. Only intangible assets (assets which don’t have physical existence) are amortised, tangible assets (assets which have physical existence) can’t be amortised.

Steps to record amortisation in a journal are as follows −

• Identify initial value of the asset.
• Life span of the asset.
• Residual value.

Formula to calculate is − amortisation expenses = (initial value-residual value)/lifespan

Advantages of amortisation are −

• Reduces tax burdens.
• Firms can show higher value of an asset.
• Firms can show more income in financial statements.

Amortising intangible assets includes −

• Note the starting date.
• Calculate initial cost.
• Estimate life span.
• Calculate amortisation value per year.

Recording the amortisation includes −

• Make an entry in firm balance sheet.
• Maintain its records.
• Never undervalue intangible assets.