What is amortization expense?

‘Amortization expense’ refers to the expense paid by individuals or companies for something over a specified period of time.  In simple terms, amortization expenses are what people owe others, and these are to be paid through regular installments for a specified period or number of months or years instead of giving the full payment up front.

Amortization is usually the route taken by various large companies and organizations when making large purchases, for example.  Instead of having to shell out large sums of money all at once for an expansion project or modernization activity, for example, companies may opt to pay for this particular project in regular installments and so spread out payments to a couple of years.  In this way, the financial statements would not indicate a sudden expense gap but, rather, reflect a more planned and tactical use of cash flow and disbursements.  This is especially helpful for companies that may have limited resources or for those that have very jittery investors and stockholders.  By spreading out the company’s spending over a long period, businesses will look more sound and financially stable.  For this particular company, the installments are its amortization expense for the intended project.  In the case of a 10-million-dollar modernization of computer networks and equipment, for example, the payments may be spread out for 5 years for an equal annual amortization expense of 2 million dollars per year.  With this example, the so-called depreciation of the computer equipment is also taken into consideration along with the entries on the company’s balance statements.

Amortization expense is also commonly associated with another type of expense called ‘depreciation expense’ since it is applied to payments for something that may lose value over the passage of time.  The major difference is that depreciation is mostly applied on tangible assets like buildings and equipment while an amortization expense deals with intangibles.