| Amortization (business) |
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Amortization is the distribution of a single lump-sum and Interest . Amortization is chiefly used in Loan repayments (a common example being a Mortgage ) and in Sinking Fund s. Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the Amortization Schedule , while more money is applied to principal at the end. The Amortization Calculator formula is: (1-vn)/i, where n = number of years, v = 1/(1+i), and i = interest rate / 100. Divide by (1+i) if a payment is due at the beginning. Another method of writing this kind of formula is: where: ''P'' = principal amount borrowed ''i'' = periodic interest rate ''n'' = number of periods ''A'' = periodic payment. Negative Amortization (also called deferred interest) occurs if the payments made do not cover the interest due. The remaining interest owed is added to the outstanding loan balance, making it larger than the original loan amount. ACCOUNTING In Accounting , amortization refers to the gradual recognition of certain expenses associated with Intangible Asset s such as Trademarks , Copyrights , Goodwill and so on, typically over a period of several years. The expenses are initially added to the value of the asset, and transferred from the Balance Sheet to the Income Statement using a fixed schedule, usually a constant amount per month (or other accounting period). The corresponding concept for tangible assets is termed professional. The proper use of amortization allows the organization to properly recognize that such expenses contribute to productivity or profitability over a relatively long period. The determination of which intangible assets can be amortized and what period to use can have significant effects on the apparent profitability of an enterprise, and consequently can affect the Stock price of a Publicly Traded corporation. It can also significantly affect the corporation's tax liability, and is an area of concern for those who must comply with the Sarbanes-Oxley act. In addition, the term ''amortisation'' is used also for gradual recognition of Deferral s in the profit and loss statements. Write-off In Accounting a Write Off is a one time charge (cost) of an amortized Fixed Asset . Writing off is the expensing of a Balance Sheet asset (item) that has no future benefits. An example would be the writing off of Goodwill . That is, the worthless Asset will be recorded as an expense on the current period's Income Statement rather than keeping it on the Balance Sheet as an asset. A write off, also known as an impairment, is a non-cash event. An impairment occurs when the expected future cash flows (undiscounted) generated by the asset are less than the current value of the asset on the balance sheet. I cannot say that my widget machine is worth $10,000 (as reflected by the amount on the balance sheet) if I expect that it will only produce $8,000 in cash flows over its expected life. In this illustration, I must reduce the book value of the widget machine to equal the expected discounted future cash flows. The amount of the reduction in asset value is the impairment (write off). Additional Note: In accounting - amortization is represented on the Debit side of the Trial Balance. Other meaning The term Write-off is also casually used to describe an expense that is a legitimate cost for the company that reduces taxable income. This type of "write off", more properly called an expense, is a cash impacting event. If I write off the cost of my business lunch, there is a corresponding cash flow impact. SEE ALSO EXTERNAL LINKS
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