A common term used for paying off of loan or debt, part-by-part, during regular intervals is Amortization. Amortization can be of any type of loan: personal, property, car or others. For example, a loan of $100,000 for a time period of 10 years, can be paid as $834 per month, without any interest.
Intangible assets are non-physical assets and have been divided to many assets. Based on the Section 197 of Internal Revenue Code, there are many ways to qualify as an intangible asset. Some of the common assets are: trademarks, copyrights, goodwill, franchise, etc.
Similar to depreciation expense, amortization expense can be defined as the process of reducing the costs or value of assets, which are intangible, over a given time period. However, unlike depreciation expense, amortization refers only to assets like copyrights or patents. For instance, depending on the lifespan of a patent on a particular object, like a 3D modeling pen, the cost of it is spread over that period of time. If the patent has a life of 10 years, the cost can be spread over those 10 years. Amortization can also be applied to balances like discounted notes and deferred charges.
Usually, companies follow an orderly manner of amortizing their assets depending on their usage and importance to the company. Many companies follow the method of Straight Line basis for both amortization and depreciation. It is considered to be the most simple way of depreciation of the value of an asset. It is a method which requires you to acquire the difference between the asset’s value and the expected salvage value, then dividing it by the years that it is to be used for. Here, only a fixed amount is to be paid as the amortization expense for the current value of the asset, every year.
Other methods could be: Sum of the year method and Declining Balance method.
Declining Balance Method
It is a very common method to calculate the rate of depreciation on non-depreciated balance. Here the cost of the assets are not spread evenly along certain time period, but at a fixed rate over the given period. The fixed rates reduce the charges of depreciation over the time period.
The sum of the years’ digits
The SYD (The sum of the years’ digits) is a type of accelerated depreciation. By this method, the depreciation rate is calculated to be more during the early years of the assets and gradually reduces to a lesser amount during the following years.
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