AMORTIZED COST Meaning and
Definition
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Amortized cost is a financial term that refers to the value of an asset or liability carried on a company's balance sheet after it has been adjusted for any amortization of premiums or discounts. It is commonly used in the context of fixed-income securities, such as bonds or loans, where the original face value may vary from its market value over time.
The amortized cost is calculated by initially recording the asset or liability at its current market value. Any premiums or discounts that arise due to differences between the market value and the face value are then gradually spread or amortized over the life of the security.
Amortizing the cost serves to align the carrying value of the asset or liability on the balance sheet with its financial impact over time. By doing so, the effect of any initial premium or discount is spread out and recognized as an adjustment to the interest income or expense over the life of the security.
This accounting method provides more accurate and consistent reporting of the true economic value of the asset or liability, particularly in cases where there are significant differences between the original face value and market value. It helps to smooth out the impact of any premiums or discounts, providing a more reliable representation of the financial position of the company.
Etymology of AMORTIZED COST
The word "amortized" comes from the French term "amortir", which means "to kill" or "to extinguish". It was initially used in the context of a debt being gradually paid off or extinguished over time.
The word "cost" has its roots in Latin, where "costus" referred to the cost or expense incurred in obtaining something.
When these two terms are combined, "amortized cost" refers to the gradual reduction or extinguishment of the original cost of an asset or liability over a specific period, taking into account factors such as interest, principal payments, and other relevant expenses. It is commonly used in finance and accounting to calculate the net book value or valuation of an asset or liability.
