Question

Amortization refers to the _________.

a) Cost allocation of a tangible asset.
b) Process of allocating to expense the cost of a plant asset over its useful life in a systematic manner.
c) Process of bifurcation of revenue and capital expenditure.
d) Cost allocation of an intangible asset.

Answer 1

Amortization is the cost allocation of an intangible asset over its useful life. It is similar to depreciation but specifically for intangible assets. Understanding it is crucial for assessing a company's financial performance.

Step-by-step explanation:

Amortization refers to the cost allocation of an intangible asset. This is the process whereby the cost of an intangible asset, such as a patent or trademark, is allocated over its useful life in a systematic and rational manner. This concept is similar to depreciation, which applies to tangible assets; however, amortization specifically applies to intangibles. Companies use these methods to not only reflect the consuming of an asset's value over time but also to conform to accounting standards and principles, matching expenses with revenues in the periods in which they are incurred.

Investment strategies and financial assets are closely related to the concept of amortization. Firms invest in assets like machinery, plants, and R&D projects, and these investments are capitalized and then amortized or depreciated over their useful lives. Understanding amortization is essential for evaluating the financial performance and health of a company.