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Accounting Examples - Amortization

 

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Amortization

Amortization, like depreciation, is the process of deducting, over a set period of time, the costs incurred in the procurement of assets.  Whereas depreciation is used to expense out (over the useful life) the costs of  tangible assets such as buildings, furniture, and machines; amortization is used to recover the cost of intangible assets such as:

Going into Business Costs - start up expenditures, cost of incorporating, etc.

Lease for Business Property

Goodwill, patents, customer base, permits, etc.

Reforestation Costs - direct costs of planting or seeding

Pollution Control Facilities

When the intangible asset is originally purchased the cost should be debited to an asset account.  This cost is then "written off" or amortized, generally using the straight line method, over the legal useful life of the asset (see IRS Publication 535 Chapter 9 for amortization period guidelines).  The straight line method is simply dividing the initial cost of the asset by its useful life.  For example if a patent is purchased for $12,000 and amortized over 15 years (180 months) then the monthly write-off would be $66.67 (12,000/180).

General Journal

Page: 1

Date

Account Titles/Explanation

Ref

Debit

Credit

20XX
Jan

31

Amortization Expense - Patents

Patents

55
14

66.67


66.67

 

 

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Monthly Interest Amortization Tables

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Loan amounts of $50 to $300,000. Interest rates of 2% to 25.75%. Terms up to 40 years.

 

 

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