Amortizable

Amortizable describes an asset or expense that can be gradually written off over a specific period, typically through regular deductions from income. This process, known as amortization, recognizes the decline in value or the consumption of the asset over time. It applies to various long-term assets, such as intangible assets like patents and copyrights or certain expenses that benefit future periods. The aim is to spread the cost of the asset, matching the expense with the revenue it generates, providing a more accurate financial picture. The accounting method helps to reflect the economic reality of the asset's use or expiration.

Amortizable meaning with examples

• A company purchased a patent with a 20-year lifespan. Because the patent is an amortizable intangible asset, the company amortizes its cost over the 20-year period. This spreads the cost across the years the patent generates revenue, reflecting the value it brings to the business yearly. This avoids a large expense in a single year, presenting a more balanced financial statement and reduces tax burden each year.
• The corporation issued a bond, with related costs to be amortized over the life of the bond. These amortizable bond costs, including underwriting fees and legal expenses, are recognized on the income statement over the term of the bond. This methodical reduction of these initial fees against income ensures a fairer reflection of the financing costs across each reporting period.
• A building purchased by a real estate firm would be amortized over it's economic life. The cost of the building (less the land) would be systematically allocated across it's expected use, mirroring the building's depreciation over time. This process accurately reflects how the asset contributes to revenues and is considered when assessing profit, loss, and the firm's financial position.
• A software company developed a new application. Development costs are considered as an amortizable asset, especially if these costs are related to a successful product. Once the product is released, the associated costs can be gradually expensed over the product's expected lifespan. This spreading of expense reflects the ongoing value of the product to the company.