Amortization

What is Amortization.?

In essence, amortization refers to paying off a debt in regular and periodic instalments over a period of time. Alternatively, it can also be used to describe the method used to deduct capital expenses over a pre-specified period of time – typically, over the life of the asset.

However, to be more specific, amortization gives us a fair idea about the consumption of the value of an intangible asset (for example, copyrights or patents).

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So our amateur readers understand better, let’s take an example of a hypothetical Biotech company named ABC Biotech Corp. Suppose, our hypothetical company has spent roughly $30 million dollars on a particular set of essential medical equipments. Also, let’s assume the patent ABC Biotech managed to derive for this new set of equipments lasts approximately one and half a decade. This essentially means that company would witness a net sum of $2 million recorded every year as an amortization expense. While depreciation and amortization are generally used interchangeably – this actually is a flawed practice (at least in strict technical terms) because depreciation means tangible assets and amortization refers to intangible assets.

It is really easy to calculate amortization using the sophisticated modern financial calculators or spreadsheet software programs like MS Excel.

Edited and Updated 4th January 2014

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