Amortization

Published Thursday 23 July 2026

Table of contents

• What is amortization?
• Asset amortization vs loan amortization
• What can you amortize?
• Why amortization matters to your business
• How amortization works
• How to calculate amortization
• Common amortization methods
• What is an amortization schedule?
• Amortization vs depreciation
• Managing amortization in your business
• Simplify amortization tracking with Xero
• FAQs on amortization
• Related terms
• Learn more about amortization

Key takeaways

• Amortization spreads the cost of an intangible asset like a patent, trademark, or copyright over its useful life, so your profit reflects reality each year.
• The straight-line method is the simplest approach: divide the asset's cost by its useful life to get the annual expense.
• The CRA sets rules on which methods and asset lifespans apply, so it pays to confirm your approach with an accountant or bookkeeper.
• Cloud accounting software can automate amortization calculations and reduce manual errors as your records update through the year.

What is amortization?

Amortization is the process of gradually writing off the cost of an intangible asset over its useful life. It's how your business records the cost of purchases like patents, trademarks, or copyrights in your accounting records and tax returns.

The term can also mean paying down a loan over time, but this article focuses on asset amortization for small business accounting.

Asset amortization vs loan amortization

The word amortization covers two different ideas, so it helps to know which one you're dealing with. Here's how they differ:

• Asset amortization: spreads the cost of intangible assets like patents, trademarks, copyrights, or goodwill over their useful life
• Loan amortization: reduces a debt balance through scheduled payments over time

This article focuses on asset amortization for business accounting. For physical assets like vehicles or equipment, the equivalent process is called depreciation.

What can you amortize?

Amortization applies to intangible assets: things your business owns that have value but no physical form. Common examples you might amortize include:

• Patents
• Trademarks
• Copyrights
• Licences
• Goodwill
• Customer lists
• Incorporation costs

Intangible assets with an indefinite life, such as some goodwill, aren't amortized. Instead, they're tested for impairment, so check the treatment for each asset with your accountant.

Why amortization matters to your business

Amortization gives you a clearer picture of your true profit and loss from year to year. Without it, writing off an asset's full value at purchase would make that year's profit look artificially low, while future years would appear more profitable than they really are.

Here's a practical example:

• The purchase: your business buys a 20-year patent for $100,000
• Without amortization: profit drops $100,000 in year one, then looks inflated for the next 19 years
• With amortization: you write off $5,000 each year for 20 years, matching the value you get from the asset

This approach helps you make better decisions because your financial statements reflect reality. It also gives you a truer view of profit when you review your small business tax rates.

How amortization works

Amortization spreads an asset's cost across your financial statements over time. Here's how the process works:

• At purchase: record the full value of the asset on your balance sheet
• Each year: amortize a portion of the asset's value to reflect its declining worth
• On your statements: the amortized amount appears as an expense on your income statement and reduces the asset's value on your balance sheet
• Tax benefit: recording amortization as an expense lowers your taxable income

This process continues throughout the asset's useful life. For a patent, that means until it expires. If you'd like a wider view of how these entries fit together, our guide to assets and liabilities is a good next read.

How to calculate amortization

Calculating amortization needs three key pieces of information, and the formula varies with the method you use. The amount you amortize each year depends on:

• Asset value: the original purchase price you paid
• Asset lifespan: how long the asset will provide value, which may be set by the Canada Revenue Agency (CRA)
• Amortization method: the calculation approach you choose, which is also subject to CRA rules

With the straight-line method, the math is simple. For example, a $10,000 patent with a 10-year useful life is amortized at $1,000 per year ($10,000 divided by 10). Cloud accounting software can automate these calculations, but you need to enter the correct information to get accurate results.

Consult an accountant or bookkeeper to avoid costly mistakes. You can find one in the Xero advisor directory.

Common amortization methods

The CRA sets rules about which amortization methods you can use in different situations, so always check with an expert before choosing. The four common approaches are:

• Straight-line amortization: writes off an equal portion each year. A $150,000 asset with a 15-year lifespan would be amortized at $10,000 per year.
• Declining balance method: amortizes more in early years and less later. A $10,000 asset at 30% would be $3,000 in year one, then $2,100 in year two (30% of the remaining $7,000), and so on.
• Double declining balance method: a form of declining balance where the rate equals 2 divided by the asset's useful life. A 5-year asset would be amortized at 40% per year.
• Annuity method: amortizes based on how much income the asset generates each year. This needs a model of the asset's lifetime earnings, making it the most complex approach.

These rules link to capital cost allowance, the system the CRA uses to set how much of an asset's cost you can claim each year. Our guide to capital cost allowance explains how the classes work.

What is an amortization schedule?

An amortization schedule is a record that tracks an asset's declining book value over its useful life. For each year, it shows the opening value, the amortization expense, and the closing value, so you can see exactly how the cost is written off over time. Accounting software builds and updates this schedule for you.

Amortization vs depreciation

Amortization and depreciation work the same way, but they apply to different types of assets. The Canada Revenue Agency's General Index of Financial Information (GIFI) sets this out for tax reporting, treating depreciation as the amortization of tangible assets and amortization as the writing off of intangible assets. The key difference is what you're writing off:

• Amortization: used for intangible assets like patents, copyrights, trademarks, and licences
• Depreciation: used for tangible assets like vehicles, tools, equipment, and machinery

Both methods spread an asset's cost over its useful life to give you accurate profit and loss reporting. On the balance sheet, the running total for tangible assets is tracked as accumulated depreciation.

Managing amortization in your business

Amortization can feel complex, but it's central to accurate financial reporting and tax time. You don't have to manage it manually.

Cloud accounting software can automate amortization calculations and track your intangible assets over time. This saves you from spreadsheet errors and helps keep your records organized and CRA-ready. Treating amortization correctly also feeds into how you record other business expenses.

Work with a qualified accountant or bookkeeper who understands your business. They can help you choose the right amortization method and keep your records accurate.

Simplify amortization tracking with Xero

Amortization is easier to manage when your records update as you go. Xero accounting software helps you track intangible assets and automate amortization calculations, so your books stay organized and support your CRA requirements at tax time. To see how it works for your business, you can start today and get your first month with Xero and get one month free.

FAQs on amortization

Here are answers to some frequently asked questions about amortization.

Is amortization an expense or a liability?

Amortization is an expense, not a liability. It appears on your income statement and lowers your taxable income while reducing the asset's book value on your balance sheet.

Can I use different amortization methods for different assets?

Yes, but the CRA has rules about which methods are acceptable and you usually need to apply a chosen method consistently once you start. Ask an accountant to confirm your approach stays compliant.

What happens if I sell an asset before it's fully amortized?

You record any remaining unamortized value and work out the gain or loss on the sale, which can affect your taxes. For example, the CRA lets corporations use a reserve to spread a capital gain over a maximum of 5 years.

Is goodwill amortized?

Goodwill with an indefinite useful life isn't amortized; instead it's tested for impairment. Goodwill and other intangibles with a set life are amortized over that period.

Should I hire an accountant to handle amortization?

For most small businesses, working with an accountant or bookkeeper is worthwhile because they make sure you use the correct methods and stay onside with CRA rules. You can find an expert in the Xero advisor directory.

Related terms

• Intangible assets
• Assets
• Fixed assets
• Balance sheet
• Income statement

Learn more about amortization

• Capital cost allowance for small businesses
• Guide to assets and liabilities
• Small business expenses
• Accumulated depreciation