Amortization expense is the write-off of an intangible asset over its expected period of use, which reflects the consumption of the asset. This write-off results in the residual asset balance declining over time. The amount of this write-off appears in the income statement, usually within the "depreciation and amortization" line item.
The accounting for amortization expense is a debit to the amortization expense account and a credit to the accumulated amortization account. The accumulated amortization account appears on the balance sheet as a contra account, and is paired with and positioned after the intangible assets line item. In some balance sheets, it may be aggregated with the accumulated depreciation line item, so only the net balance is reported.
Amortization is almost always calculated on a straight-line basis. Accelerated amortization methods make little sense, since it is difficult to prove that intangible assets are used more quickly in the early years of their useful lives.
Amortization is most commonly used for the gradual write-down of intangible assets. Examples of intangible assets are:
Amortization Expense Example
ABC Corporation spends $40,000 to acquire a taxi license that will expire and be put up for auction in five years. This is an intangible asset, and should be amortized over the five years prior to its expiration date. The annual journal entry is a debit of $8,000 to the amortization expense account and a credit of $8,000 to the accumulated amortization account.
The rate at which amortization is charged to expense in the example would be increased if the auction date were to be held on an earlier date, since the useful life of the asset would then be reduced.