What is Amortization

In any organization or business,  there are office equipment, properties, building, vehicles, machinery and tools that are used for years in office or production and it is needful to calculate their useful life to announce the management about date of exchange them with a new one, and so it is important for management to know about charges of these exchanges.

Amortization refer to intangible assets but for tangible assets like office furniture, the term Depreciation will be used

Depreciation example of a chair

For Example: When a table is new, it has 100% of its purchase price value, after one year, its value is 80% of its purchase price, after 2nd year, , its value is 60% of its purchase price, … and to the end that is 10%

life Percentage of amortization
Life percentage of amortization

Amortization example

For example you established a print center and you purchased a special license for a print software for $ 110,000 regard to printer system’s manufacturer manual, this license of print system could be used for maximum¬† 30,000 hours running.You will use this print system for 8 hours per day

30000 (All hours of print life ) / 8 hours using per day = 3750 days

3750 days is useful life of this printer license for your company regard to 8 hours using per day

3750 days = 10 years

Maximum life will be : 10 years
So that, every year, $3000 value will be reduced of its useful life

So after this time, you should buy a new one

Therefore you have an expense account in your office
It is $3000 per year for print system
$250 per month

Reduced useful life of printer hardware (tangible assets) named “Depreciation”.

Reduced useful life of printer software (Intangible assets) named “Amortization”.

For above example monthly Amortization account will be debit for $250.

Next Read: Journal entry of Amortization