{"id":1660,"date":"2023-09-23T17:47:40","date_gmt":"2023-09-23T17:47:40","guid":{"rendered":"https:\/\/mudabicara.com\/en\/?p=1660"},"modified":"2023-09-23T17:47:40","modified_gmt":"2023-09-23T17:47:40","slug":"what-is-amortization-definition-how-to-calculate-benefits-and-case-examples","status":"publish","type":"post","link":"https:\/\/mudabicara.com\/en\/what-is-amortization-definition-how-to-calculate-benefits-and-case-examples\/","title":{"rendered":"What is Amortization? Definition, How to Calculate, Benefits, and Case Examples"},"content":{"rendered":"

Hello Mudalovers<\/em>, some of you may have heard or often heard the term amortization. <\/span>This term is commonly used in the business world, especially in the fields of finance and accounting. <\/span>Basically, the concept of amortization is an accounting process that plays an important role in knowing the condition and financial reports of a business.<\/span><\/span><\/p>\n

Simply put, amortization is taken to reduce the cost and value of intangible assets. <\/span>This activity is carried out periodically because it is related to the devaluation or reduction in the value and economic life of company assets.<\/span><\/span><\/p>\n

Based on this interpretation, we can conclude that the concept of amortization is different from depreciation. <\/span>Therefore, amortization cannot be confused with depreciation, although both have interdependent roles.<\/span><\/span><\/p>\n

But, what is actually meant by the meaning of amortization? <\/span>So, in this article we will discuss in more depth the meaning of amortization. <\/span>Regarding this, continue reading this article so you don’t misunderstand the meaning of amortization.<\/span><\/span><\/p>\n

<\/span>Understanding Amortization<\/span><\/span><\/b><\/h2>\n

Amortization comes from the English word, which comes from the word\u00a0 <\/span><\/span>amortize<\/span><\/span><\/i> . <\/span>Literally, the meaning of the word\u00a0 <\/span><\/span>amortize\u00a0<\/span><\/span><\/i> is “to bring death”. <\/span>Then, this term is used in the fields of finance, accounting and taxation. So, the definition of amortization is a debt settlement procedure that takes place in stages over a certain period of time.<\/span><\/span><\/p>\n

The definition of amortization is a repayment process that takes place over a certain period or period of time and also occurs in stages. <\/span>A simple example of amortization payments is monthly bill payments for car loans, credit card loans, mortgage loans, and many more.<\/span><\/span><\/p>\n

The Amortization payment procedure also has its own calculation method. <\/span>However, what is certain is that the installment amount or number of installments must be greater than the principal amount of the loan and the interest that must be paid by the borrower.<\/span><\/span><\/p>\n

Thus, this amortization value will be amortized gradually according to each installment. <\/span>Amortization can also be understood as the spread of the amount or cost of capital as an asset or intangible asset over a certain period of time. <\/span>Typically, amortization is applied as long as the asset can still be used.<\/span><\/span><\/p>\n

Another interpretation of the amortization concept is an accounting process carried out by gradually reducing the value of liabilities or expenses and intangible assets. <\/span>The write-off of these intangible assets will be carried out according to their economic life, limited by making periodic expenditure allowances on the value of income.<\/span><\/span><\/p>\n

The allocation of costs for these intangible assets will focus more on reducing the value of liabilities. <\/span>This is done by paying the principal of the loan along with the interest. <\/span>So that later you will know the number of installments that must be paid until the loan period can be repaid.<\/span><\/span><\/p>\n

Another function of depreciation is to reflect the resale value of intangible assets. <\/span>An example is when you take out a loan with a certain installment price, you will find that the amortization value is the same as the number of installments that must be paid.<\/span><\/span><\/p>\n

However, to understand the meaning of depreciation, we must also understand the term amortization fund. <\/span>What is meant by amortization fund is an effort to collect funds or cash periodically so that the amortization costs for each period can be paid off. <\/span>As a result, the company will be able to pay the bill from its current amortization expenses.<\/span><\/span><\/p>\n

In addition to the definition above, according to the Financial Services Authority (OJK), amortization is an accounting procedure that systematically reduces the value of costs and fixed assets or other intangible assets through recurring charges on profit and loss. <\/span>Depreciation amortization applies to intangible assets that have an identifiable useful life.<\/span><\/span><\/p>\n

Useful life is the economic life of an asset (the length of time the asset is useful for its owner) or its contractual\/legal life (for example the life of a patent or license). <\/span>Limiting factors such as government regulations or other market factors can cause the economic life of an asset to be shorter than its legal or contractual life.<\/span><\/span><\/p>\n

In accounting books, a company’s intangible assets are presented in the long-term assets section of the balance sheet, while amortized costs are recognized in the income statement. <\/span>However, because amortization is a non-cash expense, it is not included in a company’s cash flow statement or in certain profit measures, such as earnings before interest, taxes, depreciation and amortization (EBITDA).<\/span><\/span><\/p>\n

Amortization of intangible assets is important because it can reduce taxable income and tax liabilities and help investors better understand true operating income.<\/span><\/span><\/p>\n

In business, if a business amortizes expenses, amortization can help link the cost of an asset to the revenue it generates. <\/span>For example, if your company purchases a dozen fabrics, the company will list the costs in the year of purchase and typically use all of the fabric in the same year.<\/span><\/span><\/p>\n

On the other hand, with large assets (large purchases of fabric), the company will be profitable in terms of costs for several years. <\/span>This can reduce costs gradually over several years.<\/span><\/span><\/p>\n

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You need to do this to better manage your finances and business. <\/span>You can read articles at mudabicara.com<\/a>!<\/span><\/span><\/p>\n

Thus, it can be concluded that amortization can be taken to reflect or reflect the resale value of an asset. <\/span>In this way, the sales value can be known and the company can benefit from amortization.<\/span><\/span><\/p>\n

<\/span>Relationship between Amortization and Depreciation<\/span><\/span><\/b><\/h2>\n

As explained previously, amortization is related to depreciation of asset value. <\/span>Apart from the relationship of understanding, these two terms in the world of accounting also have a relationship to a number of other issues.<\/span><\/span><\/p>\n

As understood, both depreciation and amortization are related to changes in asset value. <\/span>Thus, the concept of amortization is a decrease in the value of intangible assets, while depreciation is a change in the value of tangible assets.<\/span><\/span><\/p>\n

Both also have related functions. <\/span>While the amortization function reflects the value of a business asset when it is resold, the depreciation function is so that the business can receive and retain income for a given month within the value of an asset. <\/span>Thus, depreciation and amortization both work by changing the value of a company’s assets in the long run.<\/span><\/span><\/p>\n

Amortization and depreciation are also related to its performance. <\/span>Both are usually taken by the company during the month of expenditure. <\/span>This means that amortization and depreciation cannot be separated. <\/span>For this reason, it is not surprising that many people think these two words have the same meaning, and many are confused about differentiating between the two.<\/span><\/span><\/p>\n

Read Also :\u00a0<\/strong><\/span>What is a Real Account? Definition, Types and Examples, and Differences!<\/a><\/strong><\/span><\/pre>\n
<\/span>Difference between Amortization and Depreciation<\/span><\/span><\/b><\/h2>\n
As mentioned in the previous section, although Amortization and depreciation are related, they still have differences. <\/span>In general, asset depreciation is the cost of depreciating fixed assets against their benefits, such as motor vehicles.<\/span><\/span><\/p>\n
Meanwhile, amortization is susceptible to depreciation of intangible assets such as accounting periods. <\/span>Companies can allocate intangible assets using an allocation system known as <\/span><\/span>\u00a0Goodwill.<\/span><\/span><\/i><\/p>\n
Another difference between depreciation and amortization is that amortization is almost always taken on a straight-line basis, so the depreciation expense recognized in each accounting period is the same. <\/span>In contrast, depreciation expenses are usually recorded on the books using an accelerated method, so that larger expenses are recognized in the previous accounting period<\/span><\/span><\/p>\n
In the case of no residual value in amortization, this relates to the characteristics of intangible fixed assets which are deemed to have no resale value at the end of their useful life or economic life. <\/span>In fact, tangible assets under depreciation always have a residual value or residual value from the use of the asset so that it can be included in the depreciation calculation.<\/span><\/span><\/p>\n
<\/span>Example of Amortization<\/span><\/span><\/b><\/h2>\n
Companies often write off certain intangible assets for amortization, such as\u00a0 <\/span><\/span>goodwill<\/span><\/span><\/i> . <\/span>There is also usually an allocation of whatever value is paid when purchasing a preference or bond. <\/span>Meanwhile,\u00a0 an amortization <\/span><\/span>fund<\/span><\/span><\/i> \u00a0can be collected periodically to cover amortization costs.<\/span><\/span><\/p>\n
<\/span>Example 1<\/span><\/span><\/b><\/h3>\n
An example of amortization is a company that has a loan of IDR 10,000,000 and pays it in installments of IDR 200,000 per year, from this the company has amortized the loan of IDR 200,000 per year.<\/span><\/span><\/p>\n
<\/span>Example 2<\/span><\/span><\/b><\/h3>\n
Depreciation will certainly be easier to understand if it is accompanied by a case study. <\/span>The simplest case study is when a company has a loan of Rp. <\/span>10 million and need to make an annual payment of IDR 750,000. <\/span>Based on this case study, it can be imagined that the company has amortized loans of up to Rp. <\/span>750,000 per year.<\/span><\/span><\/p>\n
<\/span>Example 3<\/span><\/span><\/b><\/h3>\n
Another case study is when a garment company holds a patent on a machine for a period of 10 years. <\/span>When the company spends Rp. <\/span>250 million to develop their product, the amortization cost is 25 million because it must be divided by the cost of the useful mass of the machine.<\/span><\/span><\/p>\n
<\/span>How to Calculate Amortization<\/span><\/span><\/b><\/h2>\n
Amortization activities will require business actors to be able to pay off debts, including principal or principal payments on loans as well as interest payments. <\/span>The purpose of the loan principal in this case is the debt balance that must be outstanding and must also be repaid by the company.<\/span><\/span><\/p>\n
Interest payments will decrease if the principal amount to be paid increases. <\/span>Over time, the amount of interest that must be paid can decrease, but the amount of principal payments can increase.<\/span><\/span><\/p>\n
The methods that can be used to calculate amortization are:<\/span><\/span><\/p>\n
<\/span>Calculating Loan Amortization in the First Month<\/span><\/span><\/b><\/h3>\n
There are six steps that a company must take to be able to calculate interest and principal during the first month of amortization. <\/span>The first step is to collect data so that the first amortization can be calculated. <\/span>Some of the information you need is the interest rate, loan term, and loan principal.<\/span><\/span><\/p>\n
The second step is to prepare working papers so that the calculation process runs smoothly. <\/span>In this case, you only need Microsoft Excel to calculate amortization. <\/span>Fill in the table based on month, principal payment, interest payment, installment amount and loan balance.<\/span><\/span><\/p>\n
Then the next step is to determine the loan for the previous month and also calculate the installment amount. <\/span>The formula that can be used to calculate the installment amount is<\/span><\/span><\/p>\n
Installment amount\u00a0 <\/span><\/span>= P x (i \/ 12) \/ 1 \u2013 (1+ (i \/ 12) -t),<\/span><\/span><\/i> \u00a0where P is the loan principal, i is the interest rate and t is the loan tenor or loan term.<\/span><\/span><\/p>\n
A simple example is if company ABC has a principal loan of 10 million rupiah, with an interest rate of 6% and a term of 12 months. <\/span>So the calculation of the installment amount is 1 <\/span><\/span>0,000,000 x (6% \/ 12) \/ 1 \u2013 (1+ (6% \/ 12) -12) = 860,664.<\/span><\/span><\/i><\/p>\n
If you already know the installment amount, the next step is to calculate the installment interest. <\/span>The formula for calculating interest installments is the previous month’s principal minus the interest rate multiplied by\u00a0 <\/span><\/span>30\/36<\/span><\/span><\/i> 0. Applying the formula from the previous example, we will see that the interest installment payment for the first month is\u00a0 <\/span><\/span>10,000,000 x 6% x (30\/360) = 50,000 .<\/span><\/span><\/i><\/p>\n
The fifth step that must be taken if you already know the value of the installment amount and the amount of interest is to find out information regarding the principal installment that must be paid. <\/span>It’s easier, you can find out the principal installments by reducing the number of installments along with the interest. <\/span>Based on the previous example, we can see that the principal installment is\u00a0 <\/span><\/span>860,664 -50,000 = 810,664.<\/span><\/span><\/i><\/p>\n
The sixth step that needs to be done is to calculate the loan balance by subtracting the principal amount from the previous month from the principal payment amount. <\/span>Based on the example above, we can see that the loan balance is 1 <\/span><\/span>0,000,000 \u2013 810,664 = 9,189,336.<\/span><\/span><\/i><\/p>\n
So, by using the six steps above, we can get an idea of \u200b\u200bthe allocation of the company’s debt balance.<\/span><\/span><\/p>\n
Read Also :\u00a0<\/strong><\/span>What is a Flexible Budget? Definition, Purpose, Function, Types, and Examples<\/a><\/strong><\/span><\/pre>\n
<\/span>Straight Line Method<\/span><\/span><\/b><\/h3>\n
In accounting, the amortization method is a measure of impairment of intangible assets. <\/span>The calculation method is similar to depreciation or depreciation of tangible assets, such as machinery and factory buildings.<\/span><\/span><\/p>\n
When a company allocates intangible assets over a period, the cost of those assets can be related to the revenue generated in each accounting period and deducted from costs over the useful life of the property.<\/span><\/span><\/p>\n
For accounting purposes, companies typically calculate amortization using the straight-line method. <\/span>With this method, the cost of intangible assets is spread evenly across all accounting periods in which the assets can benefit. <\/span>The formula:<\/span><\/span><\/p>\n
Annual amortization expense = asset acquisition cost\/useful life<\/span><\/span><\/i><\/p>\n
The cost of acquiring an asset takes into account the carrying amount, if any, including other costs that may be incurred to acquire the asset. <\/span>For example, commission, legal, administrative and other costs. <\/span>The useful period here is given as an estimate if there is no definite validity period as required by the state or law.<\/span><\/span><\/p>\n
Example: PT Sinar Jaya purchased the copyright to computer software from an investor to support the company’s production for IDR 180,000,000. <\/span>PT Sinar Jaya spent IDR 20,000,000 for patent registration and obtained inventor’s rights for 20 years.<\/span><\/span><\/p>\n
But then there was a lawsuit from another inventor over a software invention patent. <\/span>The court process cost PT Sinar Jaya IDR 50,000,000 but won the case. <\/span>Then the annual amortization cost is:<\/span><\/span><\/p>\n
(IDR 180,000,000 + IDR 20,000,000 + IDR 50,000,000)\/20 years = IDR 12,500,000 per year<\/span><\/span><\/i><\/p>\n
<\/span>Declining Balance Method<\/span><\/span><\/b><\/h3>\n
The declining balance method is a cost and expense allocation system in which the budgeted amount decreases each year as the asset’s useful life increases. <\/span>With this declining balance method, the depreciation expense will be much higher in the previous year and even lower in the following year.<\/span><\/span><\/p>\n
<\/span>Amortization Benefits<\/span><\/span><\/b><\/h2>\n
Amortization is one of the most important aspects of business accounting and not for just anything.<\/span><\/span><\/p>\n
For example, calculating amortization is a sure-fire way for companies to predict the health of their financial statements. <\/span>Apart from that, he can also tell the company about the debts the company has. <\/span>So, apart from these two things, here are other benefits of amortization that companies can get as revealed by\u00a0 <\/span><\/span>Chron<\/span><\/span><\/i> :<\/span><\/span><\/p>\n