Project Management

Amortization

last edited by: Syed Arshad Ali Ahmed on Nov 17, 2020 3:49 AM login/register to edit this page


Intangible assets, like many produced in the IT world (patents, inventions, a business process or system that offers competitive advantage), contribute to the future revenues. Therefore they can be expensed over time as those revenues occur.

Amortization and depreciation are two methods of calculating the value for business assets over time.

A business will calculate these expense amounts in order to use them as a tax deduction and reduce their tax liability.

1. Amortization is the practice of spreading an intangible asset's cost over that asset's useful life.

2. Depreciation is the expensing of a fixed asset over its useful life.

3. Depletion method, which is an accrual accounting method used by businesses that extract natural resources from the earth—such as timber, oil, and minerals.

Note: Understanding amortization can be important when looking at ROI for your project. If the costs can be spread out over time, returns may come faster than you would expect.

Calculating Amortization The formula for calculating the amortization on an intangible asset is similar to the one used for calculating straight-line depreciation.

Divide the initial cost of the intangible asset by the estimated useful life of the intangible asset.

uFormula/u

initial cost ÷ useful life = amortization per year

uExample/u

If it costs $100,000 to acquire a patent and it has an estimated useful life of 10 years, the amortized amount per year equals $10,000. The amount of amortization accumulated since the asset was acquired appears on the balance sheet as a deduction under the amortized asset.

$100,000 ÷ 10 (yrs) = $10,000 per year


last edited by: Syed Arshad Ali Ahmed on Nov 17, 2020 3:49 AM login/register to edit this page


ADVERTISEMENTS

"The purpose of art: to make the unconscious conscious."

- Richard Wagner