Get the Ultimate Tax Return Checklist!

Skip to content
Profits Plus Logo
  • Why Outsource?
  • Services
      Choose A Service
      • Personal Tax Outsourcing
      • Outsourced Payroll
      • Outsourced Bookkeeping
      • Virtual Finance
      • Management Accounting
      • Year End Accounts
      • Company Secretarial

      Change UP your accountancy business

      Enquire now
  • Our Team
      • Our HistoryWho are we?
      • Meet the TeamMeet Us
  • Guides
      Xero Bookkeeping
      • Xero Bookkeeping GuideThe Ultimate Guide? You be the judge!New
      • Is Xero the best bookkeeping software?Read our post to find out how well Xero fares .
      • 10 ways to improve your bookkeepingYou’ll like number 1! Not sure why.
      Tax
      • Making Tax Digital – Our GuideDon’t be without this free resource in 2024New
      • What to include in your Tax ReturnA few hints and tips from our teamHelpful
      • Health TipHow to stay healthy during the “mad” season
      More Help from Profits Plus
      • Profits Plus BrochureA explanation of all that we cover in PDF!New
      • Amazon Bookkeeping Services?Do NOT miss this guide!
      • GlossaryOur Glossary of accounting terms
      Is Outsourcing right for me?

      Full to the brim with clients and feeling the pressure?

      How to speed up payments?

      Get paid much quicker with our help.

      How to make the most of your Virtual Team?

      Leading and managing a team is not easy. Here’s some help

  • News
      • UK Autumn Budget 2024Your 2024 Budget update!Hot Topic!
      • What is credit control?One of our helpful posts Hot Topic!
      • Is Outsourcing Right For Me?Well, is it?Hot Topic!
Enquire Now
Profits Plus Logo
Profits Plus Logo
  • Why Outsource?
  • Services
      Choose A Service
      • Personal Tax Outsourcing
      • Outsourced Payroll
      • Outsourced Bookkeeping
      • Virtual Finance
      • Management Accounting
      • Year End Accounts
      • Company Secretarial

      Change UP your accountancy business

      Enquire now
  • Our Team
      • Our HistoryWho are we?
      • Meet the TeamMeet Us
  • Guides
      Xero Bookkeeping
      • Xero Bookkeeping GuideThe Ultimate Guide? You be the judge!New
      • Is Xero the best bookkeeping software?Read our post to find out how well Xero fares .
      • 10 ways to improve your bookkeepingYou’ll like number 1! Not sure why.
      Tax
      • Making Tax Digital – Our GuideDon’t be without this free resource in 2024New
      • What to include in your Tax ReturnA few hints and tips from our teamHelpful
      • Health TipHow to stay healthy during the “mad” season
      More Help from Profits Plus
      • Profits Plus BrochureA explanation of all that we cover in PDF!New
      • Amazon Bookkeeping Services?Do NOT miss this guide!
      • GlossaryOur Glossary of accounting terms
      Is Outsourcing right for me?

      Full to the brim with clients and feeling the pressure?

      How to speed up payments?

      Get paid much quicker with our help.

      How to make the most of your Virtual Team?

      Leading and managing a team is not easy. Here’s some help

  • News
      • UK Autumn Budget 2024Your 2024 Budget update!Hot Topic!
      • What is credit control?One of our helpful posts Hot Topic!
      • Is Outsourcing Right For Me?Well, is it?Hot Topic!

Amortisation Definition

Table Of Contents

Introduction to Amortisation

Understanding Amortisation: A Key Concept in Accounting and Finance

Amortisation is a crucial concept in the world of accounting and finance that plays a vital role in understanding a variety of financial transactions. From loan repayments to intangible asset expenses, understanding how amortisation works is essential for accurate financial reporting and decision-making.

Simply put, amortisation refers to the systematic process of spreading out the costs of an expense or a loan over a specific period. It allows businesses to allocate expenses or repayments in a way that reflects the asset’s or the loan’s actual value over its useful life.

In accounting, amortisation is especially important because it helps companies accurately reflect the reduction in value of intangible assets such as patents, copyrights, and trademarks. By amortising these assets, businesses can align their expenses with the value these assets provide over time.

Another crucial application of amortisation is in finance, where it is commonly used to calculate loan repayments. When individuals or businesses borrow money, amortisation helps determine the periodic payments needed to gradually reduce the principal loan amount over time, considering both the interest and the repayment term.

Amortisation in Accounting

A. Amortisation of Tangible Assets

Tangible assets are physical assets that have a finite useful life. These assets include machinery, buildings, equipment, vehicles, and more. The process of amortising tangible assets involves spreading the cost of the asset over its useful life. This allows businesses to allocate the cost of the asset to the periods in which it provides economic benefits.

Definition and examples of tangible assets:

Tangible assets are assets that have a physical existence and can be seen and touched. Examples include buildings, vehicles, furniture, and machinery.

Explanation of how amortisation is calculated for tangible assets: Amortisation for tangible assets is calculated by dividing the cost of the asset by its estimated useful life. This results in an annual amortisation expense.

Importance of accurate amortisation recording for businesses: Accurate recording of amortisation is crucial for businesses as it allows them to accurately reflect the cost of using tangible assets in their financial statements. It also helps in evaluating the asset’s performance and making informed decisions regarding its replacement or sale.

Impact of amortisation on financial statements: The amount of amortisation recorded in each accounting period reduces the value of tangible assets on the balance sheet. It also affects the net income of the business as it is included as an expense in the income statement.

B. Amortisation of Intangible Assets.

Intangible assets are non-physical assets that provide economic benefits but do not have a physical substance. Examples of intangible assets include patents, trademarks, copyrights, goodwill, and intellectual property rights. The amortisation of intangible assets is essential for businesses to systematically allocate their costs over their useful life.

Trademarks in Accounting

Definition and examples of intangible assets:

Intangible assets are assets that lack physical form but hold value for a business. Examples include patents, trademarks, copyrights, and brand recognition.

Explanation of how amortisation is calculated for intangible assets:

Amortisation for intangible assets is generally calculated using the straight-line method. The cost of the asset is divided by its estimated useful life to determine the annual amortisation expense.

Assets in accouting

Significance of intangible asset amortisation for businesses: Amortising intangible assets allows businesses to accurately reflect the cost of utilising these assets over time. It helps in assessing their value, tracking their performance, and making informed decisions regarding their management.

Role of amortisation in valuing businesses and investments:

Amortisation plays a crucial role in valuing businesses and investments as it enables a more accurate representation of the value of intangible assets. It helps potential investors and stakeholders make informed decisions.

Understanding how amortisation works is essential for individuals and businesses alike, as it allows for more accurate financial planning, better decision-making, and transparency in financial reporting.

Amortisation Methods

Straight-line Amortisation Method

The straight-line amortisation method is a commonly used technique in financial accounting to allocate the cost of an intangible asset over a specific period of time.

Explanation of the straight-line method:

This method evenly spreads the cost of the asset over its useful life. It assumes that the asset’s value depreciates evenly over time. The calculation is simple: divide the total cost of the asset by the number of years of its useful life.

Advantages and limitations of using this method:

Advantages:

  1. Simple and easy to understand
  2. Provides a uniform allocation of costs
  3. Makes financial statements more accurate and comparable

Limitations:

  1. Does not take into account the asset’s actual usage or productivity
  2. May not accurately reflect the asset’s value over time
  3. Does not consider inflation or changes in market conditions

Step-by-step calculation example using the straight-line method:

Let’s assume we have an intangible asset worth $10,000 with a useful life of 5 years. The annual amortisation expense using the straight-line method would be $2,000 ($10,000 / 5 years).

Declining Balance Amortisation Method
The declining balance amortisation method is another widely used technique for allocating the cost of an asset over its useful life.

Overview of the declining balance method:

This method assumes that the asset depreciates faster in the earlier years of its useful life and slows down over time. It calculates the depreciation using a fixed rate, typically a multiple of the straight-line rate, applied to the asset’s book value at the beginning of each period.

Advantages and limitations of this method:

Advantages:
Recognises the asset’s higher usage and productivity in its early years
May better reflect the asset’s actual value over time
Provides higher deductions in the early years, reducing taxable income


Limitations:
Complex calculation method
Book value may reach zero before the asset’s useful life ends
Requires estimation of useful life and depreciation rates
Step-by-step calculation example using the declining balance method:

Let’s say we have the same £10,000 intangible asset with a useful life of 5 years. Assuming a declining balance rate of 40%, the first year’s amortisation expense would be £4,000 (£10,000 * 40%). In the second year, the expense would be £2,400 (£6,000 * 40%). The calculation continues until the asset’s book value reaches zero or the end of its useful life.

  1. Home
  2. Glossary
  3. Amortisation Definition

Time to Read:

6 minutes

Naveed Mughal

Naveed Mughal

  • LinkedIn
I help accounting firm owners who would like to lessen the compliance burden and focus on advisory and adding value to their clients.

Related Terms

Lady Discussing Financial Earnings between interest and Taxes with her accountant
Earnings before interest and taxes – EBIT
Naveed MughalByNaveed Mughal
What is a financial Statement?
What is a Financial Statement?
Naveed MughalByNaveed Mughal
What is Depreciation
What is Depreciation?
Naveed MughalByNaveed Mughal
Financial Ratios
Financial Ratios
Naveed MughalByNaveed Mughal
Balance Sheet
Balance Sheet
Naveed MughalByNaveed Mughal
Working Capital
Working Capital Definition – Accounting Help
Naveed MughalByNaveed Mughal
Deferred Tax Liability
Understanding Deferred Tax Liability in the UK
Naveed MughalByNaveed Mughal
Double Entry Accounting
Double Entry Accounting
Naveed MughalByNaveed Mughal
Services
Bookkeeping
Payroll
Virtual Finance
Year-End Accounts
Tax Returns
Management Accounting
Company Secretarial
Policies
Privacy Policy
Cookie Policy
Terms of Website Use
Help
Xero Guide to Bookkeeping
Amazon Seller Bookkeeping
Accounting Glossary
About Us
About Us
Meet the Team

Social

Facebook Linkedin X Profits Plus link to Linktr.eeGoogle My Business Logo

News

  • Navigating the UK Tax System: A Comprehensive Guide for Small BusinessesNovember 29, 2024
  • UK Autumn Budget 2024August 16, 2024
  • Making Tax Digital for Income Tax: The Comprehensive GuideJanuary 8, 2024
  • Ultimate Checklist for Doing Your Tax Return: What to Include and What to SkipJanuary 3, 2024
  • Which is the best accounting and bookkeeping software for 2025August 4, 2023
Share

      Sign Up to the Profits Plus Newsletter

      Profits Plus Outsourcing Accountancy Logo

      Hours:

      Monday: 09.00 - 17.00

      Tuesday: 09.00 - 17.00

      Wednesday: 09.00 - 17.00

      Thursday: 09.00 - 17.00

      Friday: 09.00 - 17.00

      Saturday: Closed

      Sunday: Closed


      Tel Number:

      01242 371041

      © 2025 Profits Plus - FINANCIALZ Limited - Company Number - 08387080 - Site by Web Design Pro

      Begin Today
      We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
      Read PolicyCookie SettingsAccept All
      Manage consent

      Privacy Overview

      This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
      Necessary
      Always Enabled
      Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
      CookieDurationDescription
      cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
      cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
      cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
      cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
      cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
      viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
      Functional
      Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
      Performance
      Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
      Analytics
      Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
      Advertisement
      Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
      Others
      Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
      SAVE & ACCEPT
      Scroll to top