Amortization – Detailed Explanation with Types of Amortization

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Amortization

Amortization refers to the process of charging an intangible asset’s cost to expense over its useful life.

The term amortization is also used for the process of assigning discount, premium or issue costs associated with a bond to income statement as expense over the life of the bond. 

It also refers to the systematic reduction of a loan’s principal amount through equal installments. The installment amount covers the interest as well as the principal loan amount.

Amortization Expense

It refers to the allocation of the cost of an intangible asset to expense over the course of its useful life.

Amortization of Bond Discount

It refers to the systematic allocation of the discount on bonds payable (a contra liability account) to income statement as interest expense over the life of the bonds. The journal entry to amortize bond discount contains a debit to the interest expense account and a credit to the Discount on Bonds Payable (a balance sheet account).

Amortization of Bond Issue Costs

It refers to the systematic allocation of the costs associated with issuance of bonds (recorded in a contra liability account) to interest expense over the term of the bonds.

Amortization of Bond Premium

It refers to the systematic allocation of the premium on bonds payable (recorded as a credit in a liability account) to interest expense over the term of the bonds. The journal entry for amortizing premium contains a debit to the Premium on Bonds Payable and a credit to the interest expense account.

Amortization of Intangible Assets

It is the process of charging the cost of an intangible asset to income statement using the asset’s expected useful life.

Amortization Schedule

It refers to a listing of periodic loan payments that include the principal amount as well as interest amount. These payments are made through equal installments until the debt is paid off by the company.

 

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