What is amortization expense?

Definition

Amortization expense is the slice of a non-physical asset's cost that belongs to the current period. On the books, this is an expense, not an asset and not a cash payment.

It hits the Income Statement while the related right stays on the Balance Sheet. The matching credit piles up in a contra account against that right.

You take it because the right is being used up. Software, patents, and purchased lists lose value as time and use pass.

Cash-basis books may never show this line if the purchase was expensed on day one. Accrual books spread the cost across the periods that actually use the right.

Where it shows up

Balance Sheet: Related to the contra account that stores the write-off to date.

P&L: Located in operating expenses.

See also: Accumulated Amortization · Intangible Assets · Non-Cash Expenses

When you look at your Income Statement, amortization expense sits in operating expenses. It is often grouped with depreciation, but it is the charge for non-physical rights, not for chairs and vans.

A higher charge can mean new software or lists were capitalized recently. A zero charge can mean there are no capitalized rights, or that they are already written down to nothing.

The Balance Sheet does not list this expense as a line. The related contra sits with the non-current assets and grows each time you record the charge.

This expense does not move cash. On the Statement of Cash Flows, it is added back when you start from profit.

How it works

The charge starts after you capitalize a right. Nothing hits this expense until a period of use has passed.

At period end you record the slice that belongs to that period. The debit hits amortization expense; the credit hits accumulated amortization.

• Capitalize the intangible when you buy or create it under policy
• Spread the cost over useful life with a period-end entry
• Debit this expense and credit accumulated amortization
• Keep the charge out of cash and out of depreciation
• Stop when the net book amount for that asset is zero

The typical slice is original cost divided by the number of periods the right will serve. A $12,000 booking tool over four years is $3,000 a year, if you take it straight-line.

The original asset cost does not change with this entry. Only the contra grows, and profit falls by the slice.

Because cash already left when you bought the right, this later charge is non-cash. Profit is lower, and the bank balance is unchanged.

If the right is impaired, that extra cut is a separate loss. It is not a substitute for this planned periodic charge.

Stop the charge when the net amount is zero, or when the right is gone. You do not keep amortizing a fully written-off item.

Stay with this expense: it is this period's slice on the P&L. The pile of all slices lives in the contra account, not here.

Keep a simple schedule of each right and this period's slice. The sum of that column should match the amount on the Income Statement.

Example

A wedding planner bought custom booking software for $12,000 cash. The software will serve the business for four years.

At year end the planner records:

Debit: Amortization expense $3,000

Credit: Accumulated amortization $3,000

The $3,000 charge sits in operating expenses on the P&L. The contra account on the Balance Sheet grows by $3,000, and cash does not move.

After four years the full $12,000 will have hit the P&L. The software can still be in use, but its book amount will be zero.

Common mix-ups

Amortization expense is not the same thing as accumulated amortization. The expense is this period's charge; the accumulated account is the pile of all charges to date.

Amortization expense is not a cash payment. The cash left when the software was bought, not when this slice is recorded.

This charge is not depreciation expense. Depreciation is the periodic write-off of physical equipment; amortization is the periodic write-off of non-physical rights.

Related terms

• Accumulated Amortization: The contra-asset account holding amortization recorded against intangible assets.
• Intangible Assets: Non-physical assets such as software, patents, and customer lists carried on the balance sheet.
• Non-Cash Expenses: Charges that reduce profit without moving cash.
• EBITDA: Earnings before interest, taxes, depreciation, and amortization.
• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
• Useful Life: The number of periods a fixed asset is expected to serve the business.
• Depreciation Expense: The periodic charge that spreads a fixed asset's cost over its useful life.