What is Amortization:
The intangible assets whose property right is obtained for the specific period of time diminish in value with the passage of time this called as amortization.
The example is patient rights, copyright, goodwill etc similarly, the value of leasehold property also decreases with the passage of time.
In business terms, this term may have different meanings depending on what object is attached or what mode. In all cases the value of a good or a liability is related to the time or useful life of the same, since as we can intuit, all goods are losing value with the passage of time, therefore, is one of the ways to quantify The loss of value.
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We can distinguish among three the following basic elements:
- Useful life is the number of years to be considered.
- Residual value: is the value of the good at the end of its useful life.
- Amortization basis: difference between acquisition value and residual value
- Type: will be the criterion used to establish it (quota, wear).
In this regard, for an asset amortization ( accounting ) will be the reduction or loss of value over time, while for a liability refers to decreased credit, of debt.
In liabilities, depreciation ( financial ) refers to the ability of repayment of a loan on the capital itself, not including interest. In a practical example, imagine an initial loan of 1000 dollars, with a 5% interest payable monthly and in year 5 and month 6 we have paid 150 dollars of the capital and 180 of interest. The amortization, in this case, would be 150 dollars, and the outstanding capital of 850 dollars.
Amortization Practical example for an asset
Imagine a new car of 20,000 dollars with an amortization of 20% per annum, that is, 4,000 dollars per year. Therefore, the useful life is 5 years (1 / 0.2) and the base of the same will be, for example, in year 3 of 12,000 dollars.
L The depreciation can be constant, or with another criterion, for example, the number of kilometers that the vehicle performs or wear. Accumulated depreciation refers to a number of resources that we have amortized from the source.