Accounting
Amortization (Intangible Assets)
Spreading the cost of an intangible asset — a patent, a trademark, purchased software — across the years it provides value, using the same logic as depreciation but for assets you can't touch.
Definition
Amortization, in this sense, is the accounting practice of spreading the cost of an intangible asset— something valuable a business owns that has no physical form, like a patent, a trademark, or purchased software — across the years it's expected to provide value, recording a portion of that cost as an expense in each of those years rather than all at once when it was acquired.
Why this exists
The root problem here is the exact same one Depreciation solves: per Accrual vs. Cash Accounting, the income statement should reflect what a business actually did during a period, not just when cash moved. A patent that cost $50,000 to acquire doesn't stop being useful the moment it's purchased — it keeps protecting the business's product for years. Expensing the whole $50,000 immediately would make that first year look artificially unprofitable, and every later year the patent is still protecting the business would look artificially more profitable, since none of its cost would show up as an expense in those years.
Amortization fixes that mismatch by spreading the intangible asset's cost across the years it's actually expected to provide value, the same way depreciation does for physical assets. The only reason it goes by a different name is that accounting convention reserves separate terms for different categories of asset: depreciation for physical, tangible assets (equipment, vehicles, buildings), depletion for natural resources (oil, timber, minerals), and amortizationfor intangible assets. The underlying idea — spread the cost over the years it's used — is identical in all three; only the label and the type of asset change.
This is also a different, unrelated use of the word from Finance's Amortization (loans & mortgages), which is about splitting a loan payment into interest and principal. The two concepts just happen to share a name — spreading the cost of an intangible asset has nothing to do with paying down a loan.
Formula & mechanics
Intangible assets are almost always amortized straight-line — the same formula as straight-line depreciation, minus salvage value, since there's usually nothing to resell when an intangible asset's useful life ends:
Annual amortization = Cost / Useful life (years)
"Useful life" for an intangible asset often comes from a legal or contractual limit — a patent's legal protection period, a license's term — rather than physical wear. Since the formula is identical to straight-line depreciation, the Depreciation Calculator can be used directly: enter the intangible asset's cost and useful life with a salvage value of $0.
Worked example
Suppose Maria's bakery pays $10,000 for a patent on a unique recipe-processing method, with 5 years of remaining legal protection.
Annual amortization = $10,000 / 5 = $2,000 per year
Each year for 5 years, the bakery's income statement records a $2,000 amortization expense tied to the patent, even though the full $10,000 in cash was spent up front, in the year the patent was acquired.
Common misconceptions
“Amortization only applies to paying down a loan.”
That's a separate, unrelated use of the same word — see Finance's Amortization (loans & mortgages). This page is about spreading the cost of an intangible asset, which has nothing to do with splitting a loan payment into interest and principal.
“Every intangible asset gets amortized.”
Only intangible assets with a finite, determinable useful life are amortized. Intangible assets with an indefinite life — most notably goodwill from an acquisition — typically aren't amortized at all, similar to how land isn't depreciated.
“Amortization expense means the asset is literally losing real-world value at that rate.”
Like depreciation, amortization is an accounting estimate of cost allocation, not a real-time measure of what the asset could actually be sold for or how much value it's really providing right now.
Also in the Glossary: Amortization (Intangible Assets), Depletion, Intangible Asset