What is amortisation? A guide to methods, calculations and examples

Published Monday 22 June 2026

Table of contents

• What is amortisation?
• What are intangible assets?
• Asset amortisation vs loan amortisation
• Why amortisation matters for your business
• How amortisation works
• How to calculate amortisation
• 4 common methods of amortisation
• Amortisation vs depreciation
• What is impairment?
• What happens when an asset is fully amortised?
• Simplify your accounting with Xero
• FAQs on amortisation

Key takeaways

• Amortisation spreads the cost of an intangible asset, such as a patent or software licence, over its useful life so your accounts reflect a more accurate picture of your business's value
• It's different from depreciation, which applies to tangible (physical) assets like vehicles and equipment, though both work by allocating cost over time
• Under FRS 102, you're required to amortise intangible assets systematically; if you can't reliably estimate the useful life, a maximum of 10 years applies
• Accounting software like Xero can help automate asset calculations, helping you save time and stay on top of your financial reporting

What is amortisation?

Amortisation is the process of spreading the cost of an intangible asset over its useful life. Rather than recording the full expense when you buy or create the asset, you recognise a portion of the cost in each accounting period. This gives you a more accurate view of your business's profitability over time.

You might also hear the term used in the context of loans. Loan amortisation refers to the structured repayment of a debt through regular instalments that cover both principal and interest. While the concept is related, this article focuses primarily on asset amortisation as it applies to your business accounts.

What are intangible assets?

Intangible assets are non-physical assets that hold value for your business. Unlike equipment or property, you can't touch them, but they still play a significant role in how your business operates and generates revenue.

Common examples of intangible assets include:

• patents
• trademarks
• copyrights
• goodwill (for example, the premium paid when acquiring another business)
• software licences
• franchise agreements

Under FRS 102 (the main UK financial reporting standard for smaller entities), you're required to amortise intangible assets that have a finite useful life. However, not all intangible assets qualify. Those with an indefinite useful life, such as certain well-established brand names, aren't amortised. Instead, they're tested for impairment each year to check whether their value has fallen below what's recorded on the balance sheet.

Asset amortisation vs loan amortisation

The word "amortisation" covers 2 distinct concepts in accounting and finance, so it's worth understanding the difference.

Asset amortisation is an accounting method. It gradually reduces the recorded value of an intangible asset on your balance sheet while recognising the expense on your profit and loss statement (P&L). The goal is to match the asset's cost with the revenue it helps generate over time.

Loan amortisation is a repayment structure. When you take out a loan, an amortisation schedule breaks each payment into 2 parts: the principal (the amount you borrowed) and the interest (the cost of borrowing). Early payments typically include more interest, with the balance shifting toward principal over time.

Both processes involve spreading costs over a set period. The key difference is that asset amortisation is a non-cash accounting entry, while loan amortisation involves real cash payments leaving your account.

Why amortisation matters for your business

Amortisation directly affects how your business reports its financial performance. Getting it right matters for your accounts, your tax position, and your understanding of what your assets are worth.

Amortisation affects your business finances in several ways:

• Accurate profit reporting: by spreading the cost of an intangible asset across the years it provides value, your P&L gives a truer picture of annual profitability
• Tax considerations: amortisation expenses can reduce your taxable profit, and HMRC's rules on intangible assets generally follow the amortisation in your accounts
• Asset tracking: recording amortisation helps you monitor the remaining value of your intangible assets so you know when they're approaching the end of their useful life

In your financial statements, amortisation shows up in 2 places. On the P&L, it appears as an expense that reduces your reported profit. On the balance sheet, it reduces the carrying value (book value) of the intangible asset. It's a non-cash expense, which means it doesn't affect the money in your bank account directly, but it does influence how your business looks on paper.

How amortisation works

Amortisation follows a straightforward process governed by FRS 102 in the UK. Once you've identified an intangible asset and determined its useful life, you record a portion of its cost as an expense in each accounting period.

The process follows these steps:

1. Record the intangible asset at its original cost on the balance sheet when you acquire or create it.
2. Determine the asset's useful life. This is the period over which you expect the asset to provide economic benefit to your business.
3. Calculate the annual amortisation expense. If you're using the straight-line method, divide the cost (minus any residual value) by the number of years of useful life.
4. Record the amortisation expense on your P&L each year and reduce the asset's carrying value on the balance sheet by the same amount.

For example, if your business acquires a patent for £100,000 and you estimate its useful life at 20 years, the annual amortisation expense using the straight-line method would be £5,000. After 10 years, the patent's carrying value on your balance sheet would be £50,000.

How to calculate amortisation

The most common way to calculate amortisation is the straight-line method. The formula is:

Amortisation expense = (Cost of asset - Residual value) / Useful life

The calculation depends on 3 factors that you'll need to determine for each intangible asset:

• Cost of the asset: the original purchase price or development cost
• Residual value: the estimated value of the asset at the end of its useful life (often zero for intangible assets)
• Useful life: the period you expect the asset to generate value; under FRS 102, if you can't make a reliable estimate, a maximum of 10 years applies

Using the earlier example, a patent that costs £100,000, has no residual value, and a useful life of 20 years would have an annual amortisation expense of £5,000.

Accounting software can automate these calculations and apply the expense entries to the correct periods in your accounts. If you're unsure which method or useful life estimate to use, it's a good idea to speak with a qualified accountant. You can find one through the Xero advisor directory, or check HMRC's guidance on intangible assets for tax relief details.

4 common methods of amortisation

The amortisation method you use is governed by UK accounting standards, primarily FRS 102. HMRC's tax relief for intangible assets generally follows the amortisation in your accounts. Always consult with an accountant or bookkeeper before choosing a method.

• Straight-line amortisation: the most widely used method. You divide the asset's cost evenly across its useful life. Each year's expense is the same, making it simple to calculate and predict.
• Declining balance method: you apply a fixed percentage to the asset's remaining book value each year. This means higher expenses in the early years and lower expenses later, reflecting assets that lose value more quickly at the start.
• Double declining balance method: a more accelerated version of the declining balance approach. The depreciation rate is doubled, which results in even higher expenses in the first few years. It's less common for intangible assets but may apply in specific circumstances.
• Annuity method: this method calculates amortisation so that the combined cost of the amortisation expense and a notional interest charge on the asset's carrying value remains constant each year. It's rarely used for intangible assets in practice but may come up in certain financial arrangements.

Amortisation vs depreciation

Amortisation and depreciation are closely related concepts, but they apply to different types of assets. Understanding the distinction helps you categorise your expenses correctly and stay compliant with UK accounting standards.

Amortisation applies to intangible assets: non-physical items like patents, copyrights, software licences, and goodwill. These assets don't have a physical form, but they hold value and contribute to your business over time.

Depreciation applies to tangible assets: physical items like vehicles, office equipment, machinery, and buildings. These fixed assets wear out, become outdated, or lose value through use.

Both methods spread the cost of an asset over its useful life, recognising a portion as an expense in each accounting period. Under FRS 102, both amortisation and depreciation must be applied systematically. The main difference is simply the type of asset involved.

What is impairment?

Impairment occurs when an intangible asset's carrying value on the balance sheet exceeds its recoverable amount. In other words, the asset is recorded at a higher value than it's actually worth. When this happens, your business must recognise an impairment loss and write down the asset's value accordingly.

This can happen for various reasons: market conditions may change, the asset may become less useful, or a competitor may develop a superior alternative. The impairment loss is recorded as an expense on the P&L, reducing your reported profit for that period.

Impairment is particularly relevant for intangible assets with indefinite useful lives, such as certain established brand names. Because these assets aren't amortised, FRS 102 requires them to be tested for impairment annually. This ensures your balance sheet reflects a realistic picture of what your assets are worth.

What happens when an asset is fully amortised?

When an intangible asset is fully amortised, its book value on the balance sheet reaches zero (or its residual value, if one was assigned). At this point, no further amortisation expense is recorded in your accounts.

A fully amortised asset can still be used by your business. A patent that's been fully amortised, for example, may still protect your intellectual property and provide commercial value until it expires. You simply don't record any additional expense for it.

If you decide to sell a fully amortised asset, any proceeds you receive are typically recorded as a gain in your P&L, since the asset's carrying value is already zero. This can have tax implications, so it's worth speaking with your accountant before completing the sale.

Simplify your accounting with Xero

Keeping track of intangible assets and their amortisation doesn't have to be complicated. Xero's cloud-based accounting software helps you manage your fixed asset register, automate calculations, and generate reports that give you a clear view of your asset values when you need it.

With real-time data and automated processes, you can help reduce time spent on manual bookkeeping and focus more on running your business. Whether you're tracking patents, software licences, or other intangible assets, Xero makes it straightforward to stay on top of your finances. Get one month free.

FAQs on amortisation

Here are answers to frequently asked questions about amortisation.

Does amortisation affect cash flow?

No, amortisation is a non-cash expense. It reduces your reported profit on the P&L but doesn't involve any money leaving your bank account. Your cash flow statement adjusts for amortisation when reconciling profit to actual cash movements.

Can you change an amortisation method after it's been set?

You can, but only if a different method better reflects how the asset's economic benefits are consumed. Under FRS 102, changing the method is treated as a change in accounting estimate and applied from the date of the change going forward.

Do all intangible assets need to be amortised?

Not always. Under FRS 102, only intangible assets with a finite useful life are amortised. Those with indefinite useful lives, such as certain established brand names, are tested for impairment annually instead.

How does amortisation affect your tax position?

Amortisation expenses can reduce your taxable profit. Under the corporate intangibles regime, HMRC generally allows tax relief in line with the amortisation in your accounts, though specific rules apply depending on when the asset was acquired.