Systematic allocation of an intangible asset's cost over the periods expected to receive its benefit.
Amortization is the accounting process of allocating the cost of an intangible asset across the periods expected to benefit from that asset. In broader finance language, amortization can also describe loan-principal repayment over time, but on this page the focus is asset accounting.
Amortization affects reported expense, asset carrying value, and period-by-period comparability. It helps keep the income statement from absorbing the full cost of a long-term intangible asset in the period it was acquired.
A business records the qualifying intangible asset first, then recognizes amortization expense over the useful life if the asset has a finite life. The periodic expense may be recorded directly against the asset or against an accumulated amortization contra account, depending on policy and system design.
Some intangible assets are not amortized because they are treated as indefinite-life assets and are instead tested for impairment. Goodwill is a common point of confusion here, especially because treatment can differ by framework and entity type.
A company buys a patent for 50,000 and expects it to provide benefit for 10 years:
| Account | Debit | Credit |
|---|---|---|
| Amortization Expense | 5,000 | |
| Patent or Accumulated Amortization | 5,000 |
The annual charge spreads the cost instead of expensing the full amount on day one.
Amortization is not depreciation, because depreciation applies to tangible long-lived assets. It is also not the same as a loan amortization table, even though the same word is used in lending.