Amortisation
What amortisation means, why it matters, how to calculate it and the four common methods.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Amortisation spreads the cost of an intangible asset across the years you use it, rather than expensing it all at once.
- The word also describes paying down a loan over time through regular repayments.
- Only intangible assets with a finite useful life are amortised; goodwill and other indefinite-life intangibles are tested for impairment instead.
- Amortisation is a non-cash expense that lowers your reported profit and can reduce the tax you pay.
What is amortisation?
In accounting, amortisation is how a business spreads the cost of an intangible asset across its useful life instead of recording it all in one year. The term can also refer to paying down a loan over time.
When you buy an intangible asset, you write off the purchase price gradually in your accounting records and on your tax returns. This gives a clearer picture of how the asset earns its keep year after year.
Asset amortisation vs loan amortisation
Amortisation comes up in two different contexts, so it helps to keep them separate. One relates to assets you own, the other to debt you repay.
When a business buys an asset, it usually writes off the cost over time rather than all at once. For physical, or tangible, assets this process is called depreciation. For intangible assets with a finite useful life, like patents, trademarks, copyrights or software licences, the process is called amortisation.
Goodwill and other intangibles with an indefinite useful life aren't amortised under NZ IAS 38. They're tested for impairment instead.
Paying down a debt over time is known as loan amortisation. Loan amortisation is worth understanding, but this definition focuses on asset amortisation.
What are intangible assets?
Intangible assets are things a business owns that have value but no physical form. You can't touch them, yet they can be central to how the business makes money. Xero explains these in more detail in the intangible assets glossary entry.
Common examples of intangible assets include:
- patents that protect an invention
- trademarks that protect a brand name or logo
- copyrights that protect original work
- software licences that grant the right to use a program
- goodwill that reflects the value of an acquired business above its net assets
Why asset amortisation matters
Businesses use amortisation to match an asset's cost to the years it delivers value, so profit isn't distorted by a single large write-off. It gives a fairer view of profit and loss from one year to the next.
Say a business buys a 20-year patent for $100,000. Writing off the full value straight away would drop profit by $100,000 in that year alone. In later years, profit would look much higher even though the patent is still working for the business.
Amortising the patent by $5000 every year for 20 years spreads the cost evenly. It's also a non-cash expense, so it lowers reported profit without any money leaving the business.
How amortisation works
Amortisation touches two financial statements and your tax bill. The asset's value sits on the balance sheet, and each year's amortisation is booked as an expense on the profit and loss statement.
The business records the full value of the asset on its balance sheet at the time of purchase. At the end of each year, it amortises the asset to reflect its loss of value.
That yearly amount is recorded as an expense on the profit and loss statement, which helps lower taxable profit. The process continues throughout the asset's useful life, so for a patent it runs until the patent expires.
Which assets can and cannot be amortised
Not every intangible asset can be amortised, and the useful life is the deciding factor. The rule keeps your accounts in line with NZ IAS 38.
Intangible assets with a finite useful life can be amortised, including patents, trademarks, copyrights and software licences. Intangibles with an indefinite useful life, such as goodwill, cannot be amortised. Instead, they're tested for impairment to check their value hasn't fallen.
How to calculate amortisation
Amortising assets can get complicated, and the formula changes depending on the method you use. You start by recording the purchase price, then write off a set amount each year.
The amount you amortise depends on:
- the value of the asset
- the asset's lifespan, which may be set by the tax office
- the amortisation method, which is also subject to rules
Some accounting software automates these calculations, but the inputs must be correct and compliant with the rules set by IRD.
Consult an accountant or bookkeeper to avoid costly mistakes. You can find one in the Xero advisor directory.
Four common methods of amortisation
IRD sets rules about which amortisation methods can be used in a given situation. Always check with an expert before choosing one of these four methods.
- Straight-line amortisation: an equal portion of the asset's value is amortised each year of its useful life. For example, a $150,000 asset with a 15-year lifespan would be amortised $10,000 per year.
- Declining balance method: the asset is amortised more in its early years and by smaller amounts later. If the asset costs $10,000, the business might amortise at 30% per year, so $3000 in the first year. The following year the remaining value is $7000, so 30% amortisation is $2100, and the pattern continues until the asset is fully amortised.
- Double declining balance method: a form of declining balance where the rate is calculated by dividing 2 by the useful life of the asset. An asset with a useful life of 5 years would be amortised at 40% per year (2 / 5 x 100 = 40%).
- Annuity method: the asset is amortised according to how much money it earns the 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 in much the same way, but they apply to different types of asset. The main difference comes down to whether the asset is physical.
Amortisation is the term for intangible assets, which are non-physical things like patents, copyrights and licences. Depreciation is the term for tangible assets, which are physical things like vehicles, tools and equipment.
Both are non-cash expenses that spread an asset's cost over time. Unlike depreciation, amortisation usually ignores salvage value, because intangible assets rarely have a resale value at the end of their life.
Simplify amortisation with Xero
Tracking intangible assets and recording amortisation each year is far easier when the numbers flow through your accounts automatically. Xero keeps your asset values and expenses in one place, so your balance sheet and profit and loss statement stay up to date.
See how it fits your business and get one month free.
FAQs on amortisation
Here are answers to some frequently asked questions about amortisation.
Do you pay tax on amortisation?
You don't pay tax on amortisation itself; it's an expense that reduces your taxable profit. That means it can lower the amount of tax your business pays.
What happens when an asset is fully amortised?
Once an asset is fully amortised, its value has been written down to zero and no further amortisation is recorded. The asset can stay on your books if it's still in use.
Can goodwill be amortised?
No, goodwill has an indefinite useful life, so it isn't amortised under NZ IAS 38. It's tested for impairment instead to check its value hasn't dropped.
Is amortisation the same as depreciation?
They work in a similar way, but amortisation applies to intangible assets and depreciation applies to tangible assets. Amortisation also tends to ignore salvage value.
What is an amortisation schedule?
An amortisation schedule is a table that sets out how much of an asset or loan is written down in each period. For a loan, it shows how each repayment splits between principal and interest.
Related terms
Learn more about amortisation
Handy resources
Advisor directory
You can search for experts in our advisor directory
Balance sheet template
Download a balance statement template to get an overview of the financial state of your business
Smash through tax time
Automate your record-keeping and experience push-button reporting for a tax season that’s almost pleasant.
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.