Amortization Basics

 

In the course of doing business, you will likely acquire what are known as intangible assets. These assets can contribute to the revenue growth of your business and, as such, can be expensed against these future revenues. An example of an intangible asset is buying a patent for an invention.

Calculating Amortization
The formula for calculating the amortization on an intangible asset is similar to the one used for calculating straight-line depreciation. You divide the initial cost of the intangible asset by the estimated useful life of the intangible asset. For example, if it costs $10,000 to acquire a patent and it has an estimated useful life of 10 years, the amortized amount per year equals $1,000. The amount of amortization accumulated since the asset was acquired appears on the balance sheet as a deduction under the amortized asset.

Formula

initial cost ÷ useful life = amortization per year

$10,000 ÷ 10 = $1,000 per year

Source: Streetwise Small Business Start-Up

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