What is amortisation?
Learn what amortisation is, how it works for intangible assets and loans, and how to calculate it.
Published Tuesday 27 October 2026
Table of contents
Key takeaways
- Amortization is the process of spreading the cost of an intangible asset over its useful life, or paying down a loan through regular payments.
- In the Philippines, intangible assets with a limited useful life (like patents, copyrights, and software licenses) can be amortized for tax purposes. Goodwill amortization isn't tax deductible.
- The straight-line method and the diminishing value method are 2 common approaches for calculating amortization.
- Amortization applies to intangible assets, while depreciation applies to tangible (physical) assets, and both help you report accurate profits and lower your tax liability.
What is amortization?
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 amortization, and it applies to 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 amortizing that debt over time.
How amortization works
Amortization 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 amortization amount. This reduction appears as an expense on your profit and loss statement.
An amortization 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 amortization 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 amortization vs loan amortization
There are 2 main types of amortization, and they work differently.
Asset amortization
Asset amortization applies to intangible assets: non-physical things your business owns that have value, like patents, copyrights, and software licenses. You spread the purchase cost of the asset across the years you expect to use it. Each year, you record an amortization expense that reduces the asset's book value.
Loan amortization
Loan amortization 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 amortized loans include mortgages, car loans, and business loans.
Why amortization matters for your business
Amortization isn't just an accounting requirement. It 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: amortization expenses reduce your taxable income each year, which can lower your tax bill at the end of the financial year.
- Better budgeting: knowing your amortization schedule helps you plan cash flow and allocate resources.
- Matching costs with revenue: you recognize expenses in the same periods that the asset generates value for your business.
- Tax compliance: under PAS 38 and PFRS for SMEs, intangible assets are amortized over their useful life, and BIR rules on deductible amortization set out what you can claim.
What assets can and can't be amortized in the Philippines
Not all intangible assets qualify for amortization under Philippine tax rules. Knowing which assets are eligible helps you claim the right deductions.
Assets that can be amortized
Under Section 34(F) of the National Internal Revenue Code (NIRC), intangible assets used in your business for a limited period can be amortized over that period. These include:
- Patents
- Copyrights
- Software licenses
- Registered designs
- In-house software developed for internal use
Assets that can't be amortized
Some intangible assets don't qualify for amortization deductions. These include:
- Goodwill: while goodwill is recorded on the balance sheet after a business acquisition, its amortization isn't deductible for tax purposes. For financial reporting under full PFRS, goodwill is tested for impairment each year rather than amortized; under PFRS for SMEs, it's amortized over its useful life.
- Intangibles with no limited useful life: assets that don't lose value over a known period generally can't be amortized for tax purposes.
Always check with your accountant or the BIR to confirm whether a specific asset is eligible. You can find an accountant through the Xero Advisor Directory.
How to calculate amortization
The most common way to calculate amortization 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.
- Divide the total cost by the number of years of useful life. This gives you the annual amortization expense.
For example, say your business buys a patent for ₱100,000 with a useful life of 10 years. The annual amortization 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 to make sure the inputs are correct and comply with BIR rules.
Common methods of amortization
There are several methods for calculating amortization. Under PAS 38 and PFRS for SMEs, intangible assets are amortized over their useful life, usually with one of the 2 methods below. BIR rules on deductible amortization determine how you claim it for tax.
Straight-line method (prime cost)
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.
For example, a ₱150,000 asset with a 15-year useful life would have an amortization expense of ₱10,000 per year.
Diminishing value method
A larger amount is written off in the earlier years, with smaller amounts in later years. This reflects that many assets deliver more value when they're new.
For example, if an asset costs ₱10,000 and you apply a 30% diminishing value rate, you'd amortize ₱3,000 in year 1. In year 2, the remaining value is ₱7,000, so you'd amortize ₱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 BIR requirements.
Amortization vs depreciation
Amortization and depreciation are closely related, but they apply to different types of assets.
- Amortization applies to intangible assets: non-physical things like patents, copyrights, and software licenses.
- 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 amortization. You can learn more about depreciation methods and how they apply to your business.
Simplify amortization with Xero
Tracking amortization manually can be time-consuming, especially when you're managing multiple assets with different useful lives and methods. Accounting software can help you track asset costs and keep your records organized for tax time. Try Xero and get one month free.
FAQs on amortization
Here are some frequently asked questions about amortization.
Can a single asset be both amortized and depreciated?
No. Each asset is classified as either tangible or intangible. Tangible assets are depreciated, and intangible assets are amortized. An asset can't fall into both categories at the same time.
Can goodwill be amortized in the Philippines?
Not for tax purposes: goodwill amortization isn't deductible, and you generally recover its cost only when you sell the business or assets it relates to. For financial reporting, full PFRS requires annual impairment testing, while PFRS for SMEs amortizes goodwill.
What is an amortization schedule?
An amortization 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 amortization an expense or a liability?
Amortization is a non-cash expense. It appears on your profit and loss statement and reduces the book value of the asset on your balance sheet. It's not a liability.
How long can you amortize an intangible asset?
The amortization period depends on the asset's useful life; for example, a patent is typically amortized over its remaining term.
Related terms
Learn more about amortization
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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.