Home Investing Dictionary Investment Term Amortization
Written by Kenny Foo   
Thursday, 12 March 2009 09:59
Amortization or amortisation has two different definition when it is applied on different matter. Amortization can be apply on liabilities and assets. For liabilities, amortization is a process of eliminating liabilities gradually, such as returning a mortgage in regular payments over a specified period of time. The payments of returning a mortgage must be able to cover both principal and interest because if it is only able to cover interest, the mortgage cannot be eliminated. For assets, amortization is a process of writing off  an intangible assets investment over the projected life of the assets. Unlike depreciation, amortization is only applying on intangible assets while depreciation is applying on tangible assets like property and machine. On the other words, amortization is used to measure the consumption of value of intangible assets.  Some good examples of intangible assets are patent and copyright. For examples, corporation BCD bought a patent of a product from other party with the price of $300,000 and the length of time for this patent is 10 years. In this case, corporation BCD need to write off $30,000 as expenses on amortization every year until the value of this patent become zero. Same with depreciation, amortization is the non-cash expenses, which means it is expenses without actual payment from the corporations. Normally, you can find depreciation and amortization as expense in income statement. To calculate earnings without including depreciation and amortization, investors can use earnings before interest, taxes, depreciation and amortization ( EBITDA ).

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Last Updated ( Saturday, 14 March 2009 11:20 )
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