Explanation :
An amortization schedule is used to reduce the current balance on a loan. On the other hand, amortization refers to paying off debt over time with regular principal and interest payments.
Intangible assets may be amortized by spreading capital expenditures over a specific period of time, of which the useful life of the asset is usually the duration.A few examples of intangible assets are patents, company names, copyrights. </
Amortization is important because it makes it easier to understand and forecast one’s business and investment costs. Loan repayments schedules show the distribution of interest vs principal payments, which provides clarity into these terms.
Purposes such as outputting the interest payments and calculating for tax purposes should be noted. An intangible asset that is amortized can significantly reduce the amount of tax a company would owe. This means investors can better estimate how accurate a company's financial statements are going to be, which is helpful for them.
Automated amortization functions are available in many accounting and spreadsheet software packages.
Amortization vs Depreciation
Amortization and depreciation are similar concepts, but they refer to different types of assets. Amortization is for intangible assets, while depreciation refers to tangible ones. The main difference between them is that amortization will be paid out evenly over the asset's lifetime - every year you will pay 1/N of its cost - whereas with depreciation the payments aren't distributed. Tangible assets are physical things like equipment, factories, inventory, and other pieces of physical property. Intangible assets refer to patents, company names, and even copyrights.In a nutshell :
- Amortization is the accounting of debt and is typically used for business loans and intangible assets. It can be accounted for either on an accrual basis or through debt-equity accounting.
- To link the asset's cost to its revenue, intangible assets are amortized from time to time.
- Amortization schedules are forecasts for the repayment of loans over specific time periods. They are often used by financiers.
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