Amortization Definition – Amortization Meaning and Example

amortization definition

Amortization Definition and Example

Amortization Definition – “A charge on the income statement reflecting a portion of the cost of an intangible asset such as a patent”.

Just like Depreciation, amortization is also a non expense charge. The only difference between the two is that depreciation is charged on the fixed assets whereas amortization is charged on intangible assets. Some of the example of intangible assets are copyrights, patents, trademarks, etc.

In addition to this, concept of amortization also applies to asset balances such as discounts on notes receivables, deferred charges. This term is also used in the lending.

Accounting Treatment of Amortization

The following is the journal entry for the Amortization

Amortization Expense                                       Dr.

To Accumulated Amortization

Example of Amortization

In order to understand amortization definition in much better way, let’s discuss an example . ABC is a medicine manufacturing company. Recently ABC has patented a chemical which is used in making cancer curing medicines which costs Rs. 15,00,000. The patent is for 5 five years. So the amortization expense will be 3,00,000 for every year. The entry in every year will be:

Amortization Expense                                          Dr. ………………………………………………..3,00,000

To Accumulated Amortization   …………………………………………………………………………………………………3,00,000

Related Financial Terms of Amortization

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