AMORTISATION Meaning and
Definition
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Amortisation refers to the systematic process of spreading out the cost of an intangible asset or a long-term liability over its useful life. It is a common accounting practice that seeks to allocate the expense of an asset or liability over time, reflecting its gradual consumption or expiration.
In the context of intangible assets, such as patents or copyrights, amortisation is used to deduct the cost of those assets over their legal or economic life. This helps to reflect their diminishing value as they are used or become less relevant.
Similarly, for long-term liabilities, such as loans or bonds, amortisation refers to the gradual reduction of the outstanding balance by making regular payments over a specified period. These payments typically cover both interest and principal, allowing the debt to be gradually extinguished until it reaches zero.
Amortisation is often applied to ensure more accurate financial reporting by matching expenses with the revenue or benefits generated from the assets or liabilities. By spreading costs over the useful life or period of obligation, amortisation helps to establish a fair representation of financial performance and position.
It is important to note that amortisation is different from depreciation, which is generally used for tangible assets like buildings or equipment. While both terms involve the allocation of costs over time, depreciation relates to the reduction in value of tangible assets due to wear and tear, obsolescence, or age, whereas amortisation is specifically used for intangibles and long-term liabilities.
Common Misspellings for AMORTISATION
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Etymology of AMORTISATION
The word "amortisation" has its origins in the Latin language. It can be traced back to the Latin verb "amortire", which means "to kill" or "to die". This verb derived from the Latin noun "mors", which translates to "death". Over time, the term "amortire" evolved into "amortisare" in medieval Latin, and later into "amortiser" in Old French. In English, it eventually became "amortize" around the 18th century. The term was originally used in a legal context to refer to the gradual extinguishing or paying off of a debt over a period of time. Today, "amortisation" is primarily used in finance and accounting to describe the process of systematically reducing a debt or liability through regular payments or installments.
Similar spelling word for AMORTISATION
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