Amortization expenses account for the cost of long-term assets (like computers and vehicles) over the lifetime of their use. Also called depreciation expenses, they appear on a company’s income statement.
When an amortization expense is charged to the income statement, the value of the long-term asset recorded on the balance sheet is reduced by the same amount. This continues until the cost of the asset is fully expensed or the asset is sold or replaced. Canada Revenue Agency sets annual limits on how much of a long-term asset’s cost can be amortized in a given year. These limits are called capital cost allowances.
The term depletion expense is similar to amortization, though it refers only to natural resources such as minerals and timber.
More about amortization expenses
In the example below, a company has spent $2,000 on a laptop. There are two ways to calculate its amortization.
The first is the “straight-line method:” The price of the laptop is divided by the number of years it is expected to be useful—five. So the company deducts $400 from its taxable income every year for five years.
The second method is called the declining balance method. It is used for assets such as laptops or vehicles that lose much of their value early on. The amount amortized each year gets smaller as the total value of the laptop is reduced: