The Probert Encyclopaedia of Money

AMORTIZATION

In business, amortization is the process of treating as an expense the annual amount deemed to waste away from a fixed asset. The concept is particularly applied to leases, which are acquired for a given sum for a specified term at the end of which the lease will have no value. It is customary to divide the cost of the lease by the number of years of its term and treat the result as an annual charge against profit. While this method does not necessarily reflect the value of the lease at any given time, it is an equitable way of allocating the original cost between periods. Goodwill may also be amortized. The statements of standard accounting practice recommend as its preferred method the writing-off in the year of purchase of all purchased goodwill. The charge should be to the reserves and not to the profit and loss account. However the standard also permits the writing-off of goodwill to the profit and loss account in regular instalments over the period of its economic life. Home-grown goodwill, if it is in the balance
sheet at all, should be similarly dealt with by one of the two methods above.
Research Amortization