What is amortisation?
Amortisation spreads the cost of an intangible asset over its useful life, or pays down a loan over time.
Published Monday 19 October 2026
Table of contents
Key takeaways
- Amortisation is the process of spreading the cost of an intangible asset over its useful life, or paying down a loan through regular payments.
- Which intangible assets you can amortise, and for how long, depends on the accounting standard and your country's tax rules. Under International Accounting Standard (IAS) 38, finite-life intangibles are amortised, while indefinite-life intangibles and goodwill are tested for impairment each year under IAS 36.
- The straight-line method is the most common approach. Other methods, like declining balance, may be allowed depending on the standard and where you operate.
- Amortisation helps your business report accurate profits, can lower your tax liability, and helps you plan budgets more effectively.
What is amortisation?
Amortisation (also spelled amortization) is the process of gradually writing off the cost of an intangible asset over its useful life. It can also refer to paying down a loan through regular scheduled payments.
When your business buys an intangible asset (like a patent or software licence), you don't expense the full cost in the year you buy it. Instead, you spread that cost across the years you'll use it. This is amortisation, and it can affect both your financial reports and your tax returns.
The term also applies to loans. When you make regular repayments on a mortgage or business loan, you're amortising that debt over time.
How amortisation works
Amortisation records the declining value of an intangible asset on your financial statements over time.
When you buy an intangible asset, you record its full value on your balance sheet. Each year, you reduce that value by the amortisation amount. This reduction appears as an expense on your profit and loss statement.
An amortisation schedule tracks this process. It shows exactly how much of the asset's value is written off each period and what the remaining book value is. For loans, an amortisation schedule breaks down each payment into the portion that goes towards interest and the portion that reduces the principal.
This process continues until the asset reaches the end of its useful life or the loan is fully repaid.
Asset amortisation vs loan amortisation
There are two main types of amortisation, and they work differently.
Asset amortisation
Asset amortisation applies to intangible assets: non-physical things your business owns that have value, like patents, copyrights, and software licences. You spread the purchase cost of the asset across the years you expect to use it. Each year, you record an amortisation expense that reduces the asset's book value.
Loan amortisation
Loan amortisation is how you pay down a debt through regular, scheduled payments. Each payment covers both principal and interest. Early in the loan term, a larger share of each payment goes towards interest. Over time, more of each payment reduces the principal balance.
Common amortised loans include mortgages, car loans, and business loans.
Why amortisation matters for your business
Amortisation also gives you a clearer picture of how your business is performing.
- Accurate profit reporting: spreading an asset's cost over its useful life avoids distorting your profits in any single year.
- Lower tax liability: amortisation expenses reduce your taxable income each year, which can lower your tax bill at the end of the financial year.
- Better budgeting: knowing your amortisation schedule helps you plan cash flow and allocate resources.
- Matching costs with revenue: you recognise expenses in the same periods that the asset generates value for your business.
- Tax compliance: tax authorities set their own rules for claiming amortisation deductions, and these vary by country.
What assets can and can't be amortised
Whether you can amortise an intangible asset depends mainly on its useful life. Under International Financial Reporting Standards (IFRS), IAS 38 says intangibles with a finite useful life are amortised and indefinite-life ones aren't.
Assets that can be amortised
Intangible assets with a set term or a predictable period of use are usually amortised. Common examples include:
- Patents
- Copyrights
- Software licences
- Licences and franchise agreements with fixed terms
- Some capitalised software, such as software developed for internal use
Assets that can't be amortised
Some intangible assets have no foreseeable end to their useful life, so they're treated differently in your financial statements. Under IFRS, goodwill and indefinite-life intangibles, such as some trademarks, are tested for impairment every year under IAS 36 instead of being amortised.
Tax rules can treat the same assets differently. In the United States, goodwill and other section 197 intangibles, such as patents, copyrights and trademarks acquired as part of buying a business, are amortised over 15 years for tax under Internal Revenue Service (IRS) rules.
Rules vary by country, so check with your accountant to confirm how a specific asset is treated. You can find one through the Xero Advisor Directory.
How to calculate amortisation
The most common way to calculate amortisation for intangible assets is the straight-line method. Here's how it works, step by step.
- Determine the total cost of the asset (including any purchase and registration fees).
- Estimate the asset's useful life in years, based on its legal or contract term or how long you expect to use it. Some tax authorities set fixed periods for certain intangibles.
- Divide the total cost by the number of years of useful life. This gives you the annual amortisation expense.
Here's an illustrative example. Say your business buys a patent for $100,000 with a useful life of 10 years. The annual amortisation expense would be $100,000 / 10 = $10,000 per year.
After year 1, the patent's book value drops to $90,000. After year 2, it's $80,000, and so on until the book value reaches $0.
Some accounting software can automate these calculations, but you'll need correct inputs that comply with the rules that apply to your business.
Common methods of amortisation
There are several methods for calculating amortisation. The ones you can use depend on the accounting standard and tax rules that apply to your business.
Straight-line method
An equal portion of the asset's cost is written off each year over its useful life. This is the simplest method and the most commonly used for intangible assets.
As an illustrative example, a $150,000 asset with a 15-year useful life would have an amortisation expense of $10,000 per year.
Declining balance method
A larger amount is written off in the earlier years, with smaller amounts in later years. This method is also called the diminishing value method, and it reflects that many assets deliver more value when they're new.
As an illustrative example, if an asset costs $10,000 and you apply a 30% declining balance rate, you'd amortise $3,000 in year 1. In year 2, the remaining value is $7,000, so you'd amortise $2,100 (30% of $7,000). This pattern continues until the asset is fully written off.
Your accountant can help you choose the right method based on the type of asset and the rules that apply where you operate.
Amortisation vs depreciation
Amortisation and depreciation are closely related, but they apply to different types of assets.
- Amortisation applies to intangible assets: non-physical things like patents, copyrights, and software licences.
- Depreciation applies to tangible assets: physical things like vehicles, equipment, and machinery.
- Both spread the cost of an asset over its useful life.
- Both are recorded as non-cash expenses on your profit and loss statement.
- Intangible assets typically have no salvage value at the end of their useful life, while tangible assets often do.
The key difference is the type of asset. If it's something you can touch, it's depreciation. If it's non-physical, it's amortisation. You can learn more about depreciation methods and how they apply to your business.
Simplify amortisation with Xero
Tracking amortisation manually can be time-consuming, especially when you're managing multiple assets with different useful lives and methods. Cloud accounting software can automate the calculations, generate amortisation schedules, and keep your records accurate for tax time. Try Xero accounting software and get one month free.
FAQs on amortisation
Here are some frequently asked questions about amortisation.
Can a single asset be both amortised and depreciated?
No. Each asset is either tangible and depreciated, or intangible and amortised, so it can't fall into both categories at once.
Can goodwill be amortised?
Under IFRS, no: goodwill is tested for impairment every year instead, as set out in IAS 36. In the United States, tax rules differ, and goodwill is amortised over 15 years for tax, according to the IRS instructions for Form 4562.
What is an amortisation schedule?
An amortisation schedule is a record that shows how an asset's value or a loan balance decreases over time. For loans, it breaks each payment into the interest and principal portions.
Is amortisation an expense or a liability?
Amortisation is a non-cash expense, not a liability. It appears on your profit and loss statement and reduces the asset's book value on your balance sheet.
How long can you amortise an intangible asset?
The amortisation period usually matches the asset's useful life, which is often its legal or contract term, such as a patent's remaining term. Some tax rules set fixed periods instead, so check which rules apply where you operate.
Related terms
Learn more about amortisation
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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.