Amortization refers to the writing off or allocating the cost of Intangible Assets or the repayment of loans and interest there on over a period of time. The Amortization is different from Depreciation; as it is concerned with the depleting value of Intangible Assets and Loan Payments.
Thus, when we talk about Amortization, we discuss two aspects:
Just like tangible assets have a limited life, intangible assets are also time limited. Intangible Assets like Licenses, patents, copyrights etc. have their applicability for a limited time and they expire afterward. Thus their value needs to be written off. Hence just like Depreciation is applied to the Tangible Assets, Amortization is applied to the Intangible Assets.
Loan Repayments are to be made over a specified period of time. These are the costs incurred by the company. Due to its amount being huge and spread over a long period of time, the loans need to be written off. Hence they are amortized as well.
In Accounting terms, Amortization is same as depreciation. It is also used to expense for the acquisition cost of the intangible assets over its useful life. The residual value of the intangible asset is reduced from the acquisition value and the amortization is applied to the rest of the amount. The amortization is applied to the intangible assets like patents, copyrights, license etc. over their estimated life, obsolescence, destruction etc. Amortization is shown in the Financial Statements of the company. It is reflected in the Balance Sheet of the company by deducting the amount of amortization from the value of the intangible asset. The guidance notes for the applicability of Amortization are contained in the IAS 38 of International Financial Reporting Standards. Further in U.S.GAAP (The United States Generally Accepted Accounting Principles) the guidance notes for amortization is contained in FAS 142.
Theoretically, the intangible assets are expensed over the years, but practically; sometimes the business may write it off in a single go.
Amortization of Loan Repayments is used by several companies. It means the repayment of the loan and its interest is distributed into Multiple Cash Flows. Unlike other repayment systems, it contains the repayment of both interest and principal amount. It is used mainly for the loans like mortgage loans or sinking funds. The payments to be made for the repayment are equally allocated over a period of time. The interest payment is generally more at the starting or initial period of amortization of schedule and at the end, the payment of principal is more than the interest. It is also known as Equated Monthly Installment (EMI).
The formula for computing Amortization of Loan Repayment:
Where, A = periodic payment amount P = amount of principal r = periodic interest rate n = total number of payments This formula is valid only if r > 0. If r = 0 then simply A = P / n.
An amortization schedule is a table containing detailed information of each periodic payment on an amortizing loan according to what is generated by the amortization calculator. Amortization is the process of paying off debts at regular intervals of a fixed amount throughout a specific period of time. Now the payment is divided into parts, wherein A portion of each payment is of interest while the remaining is the principal amount. Now to determine the rate or the percentage of interest is determined through an amortization schedule.
Amortization calculation is a complex and difficult task. It requires knowledge of all the applicable IFRS and U.S.GAAPS. Thus understanding Amortization requires professional help. Urgenthomework.com is the platform that can help you understand this topic with completely and with ease. We can help you write accounting assignments with efficient, effective and 100% authentic content which can help you in scoring well. We have a team of experts who are the best in their field and have vast experience. They can help you in writing strong content for your assignment which will help you to fetch good marks. Not only this, you can ask for your doubts as well from the experts. You can avail doubt sessions from our experts. You can also take online tutoring from our experts. This will help the students in getting a good grip on the subjects.
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