Amortisation

Published Friday 24 July 2026

Table of contents

• What is amortisation?
• Asset amortisation vs loan amortisation
• What assets can be amortised
• Why asset amortisation matters
• How amortisation works
• How to calculate amortisation
• Four common methods of amortisation
• Amortisation vs depreciation
• Automate amortisation with Xero
• FAQs on amortisation
• Related Terms
• Learn more about amortisation

Key takeaways

• Amortisation spreads the cost of an intangible asset across its useful life, so your profit reflects the value you get from that asset each year.
• Amortisation applies to intangible assets like patents and trademarks, while depreciation covers physical assets like vehicles and equipment.
• Recording amortisation as an expense lowers your taxable profit, which can reduce the tax you pay.
• The tax office sets rules on useful life and which method you can use, so it pays to check with an accountant before you start.

What is amortisation?

Amortisation is how a business writes off the cost of an intangible asset over its useful life for bookkeeping and tax. It can also mean paying down a loan over time.

When you buy an intangible asset, you record the purchase in your accounting records and on your tax returns, then write off the price gradually rather than all at once. Cloud accounting software can track this for you as the asset's value reduces year by year.

Asset amortisation vs loan amortisation

The word amortisation carries two meanings, and it helps to tell them apart before you dig in. One relates to assets, and the other relates to loans.

When you buy an asset, you usually write off the cost over time instead of all at once. For physical, or tangible, assets that process is called depreciation. For intangible assets like patents, trademarks, copyrights or goodwill, it's called amortisation.

Paying down a debt is loan amortisation, and the repayment plan that maps this out is an amortisation schedule. This definition focuses on asset amortisation.

What assets can be amortised

You amortise intangible assets, which are valuable things your business owns that you can't physically touch. Here are the intangible assets you can typically amortise:

• patents
• trademarks
• copyrights
• licences
• goodwill

Why asset amortisation matters

Amortisation gives you a clearer sense of your profit and loss from year to year. Writing off the full value of an asset when you buy it would make your profit look artificially low that year.

Say your business buys a 20-year patent for $100,000. If you wrote off the full value straight away, your profit would dip $100,000 in that year alone. In later years, profit would look a lot higher even though you're still getting value from the asset.

Amortising the patent by $5,000 every year for 20 years spreads the cost more evenly, so you can see your profitability from one year to the next.

How amortisation works

You record the full value of the asset when you buy it, then reduce that value at the end of each year to reflect the value it loses over time. Two of your key reports capture this.

The amount you amortise shows on the balance sheet and is recorded as an expense on the profit and loss statement. Recording amortisation as an expense helps to lower your tax.

This continues throughout the useful life of the asset. So if it's a patent, it runs until the patent expires.

How to calculate amortisation

Amortising assets can get complicated, and the formula may change depending on the method you use. You start by recording the purchase price, then amortise a set amount each year based on these factors:

• the value of the asset
• the asset's lifespan, which the tax office may set
• the amortisation method, which is also subject to rules

Some accounting software automates these calculations, but your inputs need to be correct and compliant with the tax office rules. To avoid costly mistakes, talk to an accountant or bookkeeper. You can find one in the Xero advisor directory.

Four common methods of amortisation

The tax office sets rules about which amortisation methods you can use in a given situation. Always check with an expert before you choose one of these four methods:

1. Straight-line amortisation: you amortise an equal portion of the asset's value each year of its useful life. For example, a $150,000 asset with a 15-year lifespan would be amortised $10,000 per year.
2. Declining balance method: you amortise more in the early years and less in later years. For example, if the asset costs $10,000, you might amortise at 30% per year, which is $3,000 in the first year. The following year the remaining value is $7,000, so 30% amortisation is $2,100, and this pattern continues until the asset is fully amortised.
3. Double declining balance method: this is a form of declining balance where you set the rate by dividing 2 by the asset's useful life. So an asset with a useful life of 5 years is amortised at 40% per year (2 / 5 x 100 = 40%).
4. Annuity method: you amortise the asset according to how much money it earns your business each year. This needs a model for the lifetime income the asset will generate, which makes it the most complex method.

Amortisation vs depreciation

Amortisation and depreciation work the same way, and the difference comes down to the type of asset. One applies to intangible assets, and the other applies to tangible assets.

Amortisation is the word for intangible assets, which are non-physical things like patents, copyrights and licences. Depreciation is for tangible assets, which are physical things like vehicles, tools and equipment.

Automate amortisation with Xero

Tracking amortisation by hand takes time you'd rather spend on your business, and small errors can be costly. Xero keeps your asset values, balance sheet and profit and loss statement in one place, so your books stay accurate and up to date.

See how much time you can save when you get one month free.

FAQs on amortisation

Here are answers to some frequently asked questions about amortisation to help you put it into practice.

Do you pay tax on amortisation?

You don't pay tax on amortisation itself, because it's an expense that reduces your taxable profit. The exact tax treatment depends on the tax office rules, so check with an accountant.

What happens when an asset is fully amortised?

Once an asset is fully amortised, its value on your balance sheet reaches zero and you stop recording amortisation expense for it. You can keep using the asset if it still has value to your business.

What is an amortisation schedule?

An amortisation schedule is a table that maps out how a balance reduces over time, most often used for loan repayments. For assets, it shows how much you write off in each period until the value reaches zero.

What is the difference between amortisation and depreciation?

Amortisation writes off the cost of intangible assets like patents and trademarks. Depreciation does the same job for tangible assets like vehicles and equipment.

Related Terms

• Intangible assets
• Assets
• Balance sheet
• Profit and loss statement

Learn more about amortisation

• Xero accounting software
• Small business guides
• Balance sheet template
• Find a Xero advisor