Amortisation spreads the cost of an intangible asset over the periods it benefits, recognising a portion as an expense each period. It works exactly like depreciation but applies to intangibles - software, patents, trademarks and similar rights - rather than physical assets.
What it means
An intangible asset bought for a fixed cost with a finite useful life is written down evenly (or on another systematic basis) over that life. Each period's amortisation reduces both profit on the income statement and the asset's carrying value on the balance sheet. Like depreciation, it is a non-cash expense.
Where it fits in
Amortisation has no direct payroll effect, but payroll software a business capitalises rather than expenses would itself be amortised over its useful life, appearing as an expense alongside the staff costs it helps process.
Key rules
- Spreads an intangible asset's cost over its useful life.
- The intangible-asset counterpart of depreciation.
- A non-cash expense reducing profit and carrying value.
- Applies only to intangibles with a finite useful life.
