Amortization explained

What is the meaning of the financial term amortization in financial statements? Let’s discuss the definition of amortization, review how large the annual amortization expense is for several large and well-known companies, and even take a look at the amortization journal entry.

It is not unusual for large multinational companies to have amortization expenses of $1 billion or more per year, and most of the amortization expenses seem to have something to do with intangible assets.

⏱️TIMESTAMPS⏱️
0:00 Introduction to amortization
0:20 Amortization real life examples
1:58 Amortization vs depreciation
2:37 Amortization definition
3:16 Amortization journal entry
3:52 Accumulated amortization
4:29 Amortization expense in the income statement

In order to grasp the concept of amortization, it is important to realize that amortization is the “sister” of depreciation. Depreciation is the accounting process of allocating the cost of tangible assets to current expense in a systematic and rational manner in those periods expected to benefit from the use of the asset. For example, tangible assets like buildings, machines, and trucks get depreciated. You buy a fixed asset for $100,000, expect to use it for 5 years, so you take $20,000 depreciation expense in each of those 5 years.

Amortization is very similar to depreciation, just change “tangible assets” in the definition for “intangible assets”: amortization is the accounting process of allocating the cost of intangible assets to current expense in a systematic and rational manner in those periods expected to benefit from the use of the asset. So while tangible assets get depreciated, intangible assets like patents, licenses, software, and capitalized research and development get amortized.

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[ZanithanGaming]

The minute you mentioned sister of depreciation and it is the depreciation of intangible assets. My brain went BOOM

[devyn]

Thank you, I was stuck here while analyzing balance sheets! Great explanation

[vanessamagnano]

Such a great video, thank you so much! Your explanation was simple and straightforward, and I appreciate that you also included a section for the actual booking of amortization

[bailarafiq]

hey, please explain amortized cost in the perspective of financial instruments. Your work is admirable.

[reena]

why do we need to amortize or depreciate? and when do we amortize and depreciate? Thank you! your answer will be so much appreciated:)

[reporttv]

Thank you very much for this information.

[dustiinde]

I am a passionate follower of you channel and I am taking Fnance cource at uni and I study here with you. What I want to ask is that when making an investment decision amortization time is considered. I dont quite understand. thanks

[loganyang]

You should come to Australia as an accounting lecturer😃

[marinaamin]

But why does the amortization reduce the profit?

[tdreamgmail]

How did this relate to buildings bought on loan?

[kylahflores]

How is an amortization relevant to the accountant

[rads_]

in the last part of the video, the weighted average amortization period is 3.4 years. I don't understand the breakdown you used to explain that because in the breakdown, there are more than 3.4 years accounted for the amortization, exceeding the weighted average amortization period

[slavicnation]

How is this related to bonds issued at a discount or premium

[sudebbhattacharjee]

Is Preliminary expenses are amortized?