Amortisation

Amortisation

Amortisation is the term used for writing off the cost of intangible assets. Intangible assets have no physical substance but provide economic benefits to the business for a limited period. Examples include patents, copyrights, trademarks, franchises, and goodwill.

The core idea is exactly the same as depreciation. Just as a building or machine loses value over its useful life and that loss is recorded as depreciation, an intangible asset like a patent also has a finite useful life. The cost of that asset must be spread across the years it benefits the business. The amount written off each year is called amortisation, not depreciation.

The Procedure

The accounting treatment for amortisation is identical to the straight-line method of depreciation. You take the cost of the intangible asset and divide it by its estimated useful life. The resulting annual amount is debited to the Profit and Loss Account and credited to the intangible asset account (or a separate accumulated amortisation account).

Worked Example from the Textbook

Suppose a business buys a patent for ₹10,00,000. The business estimates that the patent will be useful for 10 years. After 10 years, the patent will have no value.

• Cost of patent: ₹10,00,000
• Useful life: 10 years
• Annual amortisation: ₹10,00,000 ÷ 10 = ₹1,00,000

Each year for 10 years, the business must write off ₹1,00,000. This ₹1,00,000 is the amortisation expense for that year. It reduces the profit of the year and also reduces the book value of the patent on the balance sheet.

Key Distinction

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