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Amortization refers to the process of spreading the cost of an intangible or tangible asset with useful life over a period of time. It is used in accounting and finance to allocate the initial cost of the asset over the expected useful time.
Amortization is a financial concept that involves the gradual reduction of spreading out of the cost of an intangible asset over a period of time. The primary contexts in which amortization is used:
Some key reasons why amortization is important:
Negative amortization occurs when the primary balance of loan increases rather than decreases over the time. It is a financial situation where the borrower’s loan payments are not sufficient to cover the interest due, resulting in the unpaid interest being added to the principal balance.
The advantages of amortization are as follows:
The disadvantages of amortization are as follows:
Amortization of loan is a process of spreading out the repayment of loan over a specific period through fixed payments. Each payment involves both principal and interest, with the goal of repaying the loan by the end of the term. The process of amortization ensures that the borrower gradually reduces the outstanding balance of the loan over time.
When you take out a loan like, mortgage, can loan or personal loan, the lender provides you with a specific amount of money.
Amortization is used for intangible assets with a finite useful life, intangible assets subject to amortization involve patents, trademarks and goodwill. Intangible assets are non-physical assets that provide long-term economic benefits to the organization and their value typically derives from intellectual rights and zero physical substance.
Whereas depreciation is used for tangible assets like buildings, machinery, vehicles, equipment and furniture that have a limited useful life and are subjects to wear and tear. Tangible assets have a physical form and can be seen and touched, also used for day to day operations of the business over a long period of time.
These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).
Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.
eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.
Amortization expenses are recorded in the income statement as operating expenses. The income statement, also known as profit and loss statement (P&L), is a financial statement that shows an organization’s revenue, expenses, and net income or net loss over a period of time, maybe a quarter or a year. Amortization expenses are included in the operating expenses section of the income statement, along with other expenses such as salaries, rent, utilities, and other expenses.
The amortization is calculated as:
Annual amortization expense = Total cost of asset / Estimated useful life
Carrying value = Total cost of asset - Cumulative amortization expense
