Amortization Expense is the cost of spreading the value of an intangible asset over its useful life. It is like depreciation, but for non-physical assets such as patents, trademarks, or software licenses. Amortization Expense appears in the income statement and reduces the value of the asset on the balance sheet over time. This helps businesses reflect the real value of their intangible assets and match expenses with revenue generation across accounting periods. It is a regular cost recorded in accounts to show how much value a company’s intangible asset loses in a year. This cost is not paid in cash every year. Instead, companies record it as an expense to adjust the asset’s book value.
What is Amortization Expense?
Amortization expense is the method of spreading the cost of an intangible asset over its useful life. This helps businesses record the true cost of using that asset in each year of its life.Intangible assets do not wear out physically, but they lose their value over time. This is why businesses use amortization. When a company buys an intangible asset, like a patent, it pays a big amount upfront. Instead of showing the entire cost in one year, it spreads the cost over the number of years the asset will be used.
For example, if a company buys a software license for ₹5,00,000 to be used for 5 years, it will record ₹1,00,000 each year as amortization expense.
This process helps the company match the cost of the asset with the revenue it generates each year. This is also called the matching principle in accounting.
How to Record Amortization Expense?
Once a business understands what amortization is, the next step is to record it correctly in the books of accounts. Recording amortization expense is part of the financial reporting process and is essential for preparing accurate income statements and balance sheets. The expense is recorded by debiting the amortization expense account and crediting accumulated amortization, a contra-asset account that reduces the value of the intangible asset. Businesses follow a simple accounting entry to record amortization expense. The goal is to reduce the value of the intangible asset on the balance sheet and show the cost in the income statement.
Here is the journal entry format:
| Account | L.F. | Debit | Credit |
| Amortization Expense Dr. To Accumulated Amortization | ₹XX | ₹XX |
- You debit the Amortization Expense, which increases your expense.
- You credit Accumulated Amortization, which reduces the asset’s book value.
Let’s say you bought a trademark for ₹2,00,000 for 10 years. Each year, you will record ₹20,000 as amortization expense.
How to Calculate Amortization Expense for Intangible Assets?
Calculating amortization expense is essential for budgeting, cost control, and accurate financial reporting. Most companies use the straight-line method, which divides the cost of an intangible asset equally over its useful life. To perform this calculation, one must understand three key elements: the asset’s initial cost, its residual value (if any), and its useful life. Following are steps to calculate:
Use this formula:
| Amortization Expense = (Cost of Intangible Asset – Residual Value) / Useful Life |
where,
- Cost of Asset: Amount paid to buy it.
- Residual Value: Value left after use. Often, it is ₹0.
- Useful Life: Number of years you expect to use the asset.
Example:
A company buys a patent for ₹3,00,000. It has no residual value and a useful life of 6 years.
Amortization Expense = ₹3,00,000 / 6 = ₹50,000 per year
This ₹50,000 is the amount recorded each year as amortization expense. It helps keep the accounting books clear and compliant with standards.
Relevance to ACCA Syllabus
Amortization expense is directly linked to IFRS standards, especially in financial reporting. ACCA students must understand the classification and treatment of intangible assets and preliminary expenses under IAS 38. ACCA requires accurate recognition, measurement, and disclosure of amortization in the financial statements. This knowledge forms the foundation for consolidation, analysis, and performance evaluation in advanced papers.
Amortization Expense ACCA Exam Questions
Q1: Under IAS 38, which of the following intangible assets can be amortized?
A) Internally generated goodwill
B) Research costs
C) Development costs meeting certain criteria
D) Brand recognition without cost
Ans: C) Development costs meeting certain criteria
Q2: What is the typical method used under IFRS to amortize intangible assets?
A) Double-declining method
B) Units of production
C) Revaluation model
D) Straight-line method
Ans: D) Straight-line method
Q3: Which financial statement shows amortization expense?
A) Statement of Financial Position
B) Statement of Cash Flows
C) Statement of Changes in Equity
D) Statement of Profit or Loss
Ans: D) Statement of Profit or Loss
Q4: What happens when the useful life of an intangible asset is revised?
A) Retrospective change in all financial statements
B) Asset is impaired
C) Amortization rate is recalculated prospectively
D) Asset is fully derecognized
Ans: C) Amortization rate is recalculated prospectively
Relevance to US CMA Syllabus
The US CMA syllabus emphasizes financial reporting and cost management. Candidates must know how intangible assets are treated for internal accounting, including amortization of prepaid expenses and their impact on financial performance. The topic supports managerial decision-making and budget planning by linking asset usage to expense allocation.
Amortization Expense US CMA Exam Questions
Q1: Which of the following would not be subject to amortization?
A) Patents
B) Prepaid rent
C) Goodwill with indefinite life
D) Copyrights
Ans: C) Goodwill with indefinite life
Q2: Which of these correctly describes amortization in management accounting?
A) Allocation of expense to equity
B) Reduction of tangible asset cost
C) Periodic write-off of intangible asset cost
D) Accumulation of capital
Ans: C) Periodic write-off of intangible asset cost
Q3: How is amortization of prepaid expenses treated?
A) As a liability
B) As an increase in asset
C) As an expense over time
D) As a gain
Ans: C) As an expense over time
Q4: What is the impact of increasing amortization on the income statement?
A) Increases operating profit
B) Decreases net income
C) Increases tax payable
D) Increases cash flow
Ans: B) Decreases net income
Relevance to US CPA Syllabus
The US CPA syllabus covers GAAP-based reporting. CPA candidates must understand the accounting treatment of amortization under ASC 350, including how to record amortization expense and distinguish it from depreciation. Proper amortization practices ensure GAAP compliance and accuracy in balance sheet presentation.
Amortization Expense US CPA Exam Questions
Q1: Under US GAAP, which of the following intangible assets is not amortized?
A) A 15-year customer list
B) A perpetual trademark
C) A 10-year software license
D) A 5-year franchise agreement
Ans: B) A perpetual trademark
Q2: Which amortization method is most common under US GAAP?
A) Declining balance
B) Sum-of-the-years’-digits
C) Straight-line
D) Income-based
Ans: C) Straight-line
Q3: What type of account is “Accumulated Amortization”?
A) Expense account
B) Contra-asset account
C) Liability account
D) Equity account
Ans: B) Contra-asset account
Q4: How is amortization expense recorded in the general ledger?
A) Credit intangible asset, debit prepaid expenses
B) Debit amortization expense, credit accumulated amortization
C) Debit liability, credit amortization expense
D) Credit retained earnings, debit assets
Ans: B) Debit amortization expense, credit accumulated amortization
Relevance to CFA Syllabus
In the CFA curriculum, amortization is discussed in financial reporting and analysis. It’s important in calculating earnings quality, adjusting EBITDA, and evaluating non-cash charges. Understanding the depreciation and amortization expense allows candidates to analyze the true operating performance of a company.
Amortization Expense CFA Exam Questions
Q1: Amortization of intangible assets is:
A) A financing activity
B) A non-cash operating expense
C) An investing activity
D) A capital expenditure
Ans: B) A non-cash operating expense
Q2: Which of the following metrics is most affected by amortization expense?
A) Gross profit
B) Revenue
C) EBITDA
D) Net income
Ans: D) Net income
Q3: Why do analysts add back amortization to net income in EBITDA calculation?
A) It is not related to operating costs
B) It is a financing expense
C) It is a non-cash charge
D) It is a tax deduction
Ans: C) It is a non-cash charge
Q4: A decrease in amortization expense likely results in:
A) Lower EBIT
B) Higher net income
C) Higher tax expense
D) Lower retained earnings
Ans: B) Higher net income
