Amortization

Amortization. In the socialist industry it represents the liquidation of the value of basic funds as they wear out, transferring that value to manufactured products (or services). It is an economic and accounting term, referring to the distribution process over time of a lasting value. Additionally, it is used as a synonym for depreciation. Amortizing means considering that a certain element of the corporate fixed asset has lost, by the mere passage of time, part of its value.

Summary

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  • 1 Objective
  • 2 Some forms of amortization
  • 3 Methods to calculate the repayment installment for a period
  • 4 Amortization from the accounting point of view.
  • 5 Amortization of a liability
  • 6 Amortization of an asset
  • 7 Sources

objective

Accumulate resources to replace the wear and tear of the funds of the basic funds during their exploitation time, as well as to replace it completely when it is decommissioned from production.

Some forms of amortization

  1. Payment of a debt by means of consecutive payments to the creditor.
  2. Gradual extinction in books of an insurance premium or bonds.
  3. Reduction in the book value of a fixed asset item .
  4. Depreciation or exhaustion
  5. Low in books

Methods for calculating the repayment installment for a period

  1. a) Amortization according to tables.
  2. b) Constant, linear or fixed-rate amortization.
  3. c) Degressive amortization with constant percentage.
  4. d) Degressive amortization by sum of digits.
  5. e) Degressive amortization due to decreasing arithmetic progression.
  6. g) Variable amortization.
  7. h) Accelerated amortization.
  8. i) Free amortization.

Amortization from the accounting point of view.

To reflect this fact in accounting, and taking into account the double-entry accounting method, it is necessary to:

  1. Provide amortization, that is, consider the decrease in the value experienced as a loss for the year.
  2. Create a negative account in the balance sheet asset, which would see its balance increase annually with the indicated decrease in the value of the asset. In this way, every element of the company’s fixed assets would be reflected by two accounts, one positive, which would collect the value of its acquisition or acquisition, and another negative (called Accumulated Amortization), which indicates what is worth less. as a consequence of the passage of time.

Amortization of a liability

The obligation to repay a loan received from a bank is a liability, the amount of which is repaid in several deferred payments over time. The principal (or principal) portion that is written off on each of those payments is an amortization.

Amortization of an asset

There are various amortization methods, both for fixed assets (fixed, increasing, decreasing installments, …). These are arithmetic techniques to distribute a certain amount, the value to be amortized, in various installments, corresponding to various periods. From a linguistic point of view, the expression depreciation is more appropriate to reflect the loss in value of tangible assets (also called fixed assets). However, the accounting standards of some countries choose the term amortization.

 

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