What is Amortisation?
Amortisation is the accounting method of spreading the cost of an intangible asset over a certain period of time which is greater than one year.
What is an Intangible Asset?
Intangible assets include things such as:
Intangible assets have no physical state but is still an asset to the business.
How to Calculate Amortisation
To calculate amortisation you first need to make an estimate of the useful life of the intangible asset.
Useful life in accounting refers to the number of years an asset will remain in service to the business and contribute to income generation.
The value of the intangible asset will be written off in equal amounts over the useful life.
Amortisation = Cost / Useful Life
An Example of Intangible Asset Amortisation
A business registers a trademark costing £20,000 and it is estimated that the trademark has a useful life of 10 years.
Therefore the trademark will be amortised at £2,000 per year (£20,000/10 years).
The amortisation at £2,000 is not a cash entry.
It is a bookkeeping entry in the accounts reflecting the decrease in value of the trademark.
The Effect On Financial Statements
Your profit and loss account will include the amortisation amount each year over the useful life of the intangible asset.
In the example above £2,000 would be charged to the profit and loss account, reducing profit.
The reduction in profit means retained profit each year is reduced, lowering shareholders funds on your balance sheet.
Updated 11 April 2019