How is Amortization determined for your Assets?
Amortization is a process similar to depreciation, but it applies to intangible assets rather than tangible ones.
Intangible assets include items like patents, copyrights, trademarks, or licenses. These assets provide long-term value to a company, but their value decreases over time due to various factors.
📌 Reasons for Amortization
- Limited Useful Life: Intangible assets have a finite period during which they provide value. As time passes, the usefulness or exclusivity of the intangible asset may decline.
- Legal or Contractual Limitations: Some intangible assets are subject to legal or contractual restrictions that define their lifespan or duration of use.
📢 Example
Let's say a company purchases a patent for $100,000.
The patent has a useful life of 10 years. To account for its diminishing value, the company will amortize the cost of the patent over the 10-year period. Each year, they would record an amortization expense of $10,000.
$100,000 ÷ 10 = $10,000 ✔️
How does it work on Modeliks?
Amortization of intangible assets follows a similar principle to depreciation. The original cost of the asset is divided by its estimated useful life, resulting in an annual amortization expense.
✍️ Annual amortization expense = Original cost of asset ÷ useful life of the asset
📢 Example
If a company acquires a trademark for $50,000 with a useful life of 5 years, the annual amortization expense would be $10,000.
$50,000 ÷ 5 = $10,000 ✔️
Both depreciation and amortization are non-cash expenses, meaning they don't involve actual cash outflows from the company. They are accounting methods used to distribute the cost of assets over their useful lives, providing a more accurate representation of expenses and financial performance over time.
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