Amortisation: Meaning, Examples & How It Works

Updated 12 Mar 2026Content was accurate at the time of publication

Amortisation (also spelled amortization) is the process of allocating the cost of an asset or the repayment of a liability over time. Whether you're managing accounting for intangible assets or planning loan repayments, understanding amortisation, amortisation schedules and amortisation expense helps you budget cashflow, present accurate financial statements and make tax-aware decisions.

What is amortisation?

Amortisation has two common uses:

Accounting (intangible asset) amortisation: spreading the cost of an intangible asset (software, licence, patent) over its useful life so expense matches the income it helps generate.
Loan amortisation: a repayment schedule that splits each periodic payment between interest and principal, gradually reducing the outstanding balance to zero.

This guide explains both meanings, shows worked calculations, gives journal entries and a sample loan amortisation schedule, and points to Australian standards and tax references for bookkeeping and reporting.

Types of amortisation: asset vs loan

Although both allocate amounts over time, asset amortisation and loan amortisation are distinct:

Asset amortisation (accounting): an expense recognition process under accounting standards (AASB 138 / IAS 38). It reduces the carrying amount of intangible assets via amortisation expense and accumulated amortisation.
Loan amortisation (finance): a repayment structure determining how regular payments are split between interest and principal (see ASIC MoneySmart for loan repayment basics).

One affects profit & loss and the balance sheet; the other primarily affects cashflow and interest cost.

Why businesses use amortisation

Businesses apply amortisation for practical and reporting reasons:

Matching principle: recognise the cost of an intangible asset in the same periods as the revenues it helps generate.
Expense smoothing: spread upfront costs to avoid volatile profit swings.
Cashflow planning: loan amortisation schedules clarify periodic cash outflows for principal and interest.
Tax and reporting clarity: amortisation creates a record of expense for financial statements; tax treatment can differ from accounting recognition.
Decision support: useful life estimates and amortisation affect KPIs such as ROA and EBITDA.

For capital allowance and tax rules see the guidance on capital allowances and tax deductions.

Amortisation vs depreciation

Key differences:

Aspect	Amortisation	Depreciation
Asset type	Intangible assets (software, licences, patents)	Tangible fixed assets (plant, equipment, vehicles)
Methods	Often straight-line	May use straight-line, declining balance or units-of-production
Residual value	Many intangibles assumed zero residual	Tangible assets often have residual value
Goodwill	Goodwill generally not amortised; tested for impairment	N/A

See Finance Lease and Novated Lease for related asset accounting.

Which assets can (and cannot) be amortised

Common intangible assets that are amortised:

Purchased software licences
Capitalised development costs (when recognition criteria are met)
Patents and licences with finite useful lives
Customer lists and contracts with determinable lives
Copyrights and franchise agreements

Assets not typically amortised:

Goodwill: generally not amortised; subject to impairment testing.
Indefinite-life intangibles: not amortised; tested for impairment.
Land and inventory: land is not depreciated; inventory is expensed when sold.
Leases: classification affects treatment; see Finance Lease.

For tax treatment consult the ATO guidance and Capital allowances and tax deductions.

Accounting treatment: journal entries and presentation

Typical annual journal entry (straight-line amortisation):

Debit: Amortisation expense (Profit & Loss)
Credit: Accumulated amortisation — intangible asset (Balance Sheet contra account)

Example:

Debit Amortisation expense $14,000
Credit Accumulated amortisation — Software $14,000

Presentation:

Profit & Loss: amortisation expense appears under operating expenses (often grouped with depreciation).
Balance Sheet: intangible asset shown at cost less accumulated amortisation = carrying (net book) value.

Consult your accountant or tax adviser for detailed guidance on journal entries and presentation.

Tax treatment and Australian references

Accounting amortisation and tax deductions can differ in timing and eligibility. Key Australian references:

AASB (Accounting): AASB 138 / IAS 38 available at https://www.aasb.gov.au/
ATO (Tax): depreciation and capital allowances at https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/
ASIC MoneySmart: borrowing and loan basics at https://moneysmart.gov.au/borrowing-and-credit

Note: Amortisation recognised for accounting may not be deductible for tax in the same period. Use phrasing such as "generally" or "typically" and consult the ATO or a tax adviser for your circumstances.

How to calculate amortisation for intangible assets (straight-line method)

Straight-line amortisation is the most common for finite-life intangibles.

Formula:

Amortisation expense per period = (Cost − Residual value) ÷ Useful life (periods)

Worked example (annual):

Cost: $120,000
Residual value: $1
Useful life: 5 years

Annual amortisation = (120,000 − 0) ÷ 5 = $14,000

Journal entry each year:

Debit Amortisation expense $14,000
Credit Accumulated amortisation — Software $14,000

After 3 years carrying amount = $120,000 − $12,000 = $18,000.

Rounding: round to cents for bookkeeping; disclose material rounding in notes if necessary.

How to calculate loan amortisation (repayment schedule)

Loan amortisation commonly uses the annuity formula to compute a fixed periodic payment that repays principal and interest over n periods.

Periodic payment formula:

A = P × [ r ÷ (1 − (1 + r)^−n) ]

Where:

A = periodic payment
P = principal (loan amount)
r = periodic interest rate (annual rate ÷ periods per year)
n = total number of payments

Worked monthly example:

Principal P = $10,000
Annual rate = 6% → monthly r = 0.06 ÷ 12 = 0.005
Term = 5 years → n = 60 months

Computed monthly payment: A ≈ $168.59

Interest and principal allocation each period:

Interest = outstanding balance × r
Principal repaid = payment − interest
New balance = prior balance − principal repaid

Sample amortisation schedule (first 6 months and final payment):

Payment #	Payment ($)	Interest ($)	Principal ($)	Outstanding balance ($)
0 (start)	—	—	—	50,000.00
1	968.59	250.00	718.59	49,281.41
2	968.59	246.41	722.18	48,559.23
3	968.59	242.80	725.79	47,833.44
4	968.59	239.17	729.42	47,104.02
5	968.59	235.52	733.07	46,370.95
6	968.59	231.85	736.74	45,634.21
...	...	...	...	...
60 (final)	968.59	4.82	963.77	0.00

Notice that early payments are interest-heavy; later payments repay more principal. Use a spreadsheet or loan amortisation calculator to generate full schedules.

If you're considering financing options for business assets, compare product pages such as Asset Finance and Business Loans to estimate periodic payments and overall interest cost.

Common methods and variations

Common amortisation approaches and when to use them:

Straight-line amortisation (intangible assets): equal expense each period — simple and common.
Effective interest method (reducing balance): used for loans, bonds and some financial instruments; interest is recognised on the carrying amount and fees may be amortised across the term.
Units-of-production: for assets where expense should follow usage; rarely used for intangibles.
Impairment testing: indefinite-life intangibles and goodwill are not amortised but tested for impairment under AASB rules (see Impairment).

Choose the method that best reflects how the asset generates economic benefits or how the liability accrues interest.

Practical examples

Case 1 — Purchased software (accounting amortisation)

Company buys software for $10,000 with a 3-year useful life, no residual.

Annual amortisation = $10,000 ÷ 3 = $10,000.

Journal entry each year:

Debit Amortisation expense $10,000
Credit Accumulated amortisation — Software $10,000

After 2 years: carrying amount = $10,000.

Case 2 — Business loan (loan amortisation)

Firm borrows $100,000 at 7% p.a., repayable monthly over 4 years.

Compute the monthly payment using the annuity formula and produce an amortisation table to budget cashflow and interest. Schedules support refinancing, early repayment or rate comparison decisions. See Business Loans and Asset Finance for product comparisons.

FAQ

Can goodwill be amortised?

Generally no under AASB/IASB standards; goodwill is tested for impairment at least annually. See Goodwill for more details.

Is amortisation tax deductible?

Sometimes. Deductibility depends on ATO rules and asset type; accounting amortisation does not automatically equal a tax deduction. See the ATO guidance at https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/

How do you choose useful life?

Estimate the period the asset will generate economic benefits. Consider legal or contractual terms, obsolescence and past experience. Document your assumptions.

What if an intangible has an indefinite life?

Do not amortise; perform impairment testing regularly under AASB guidance.

Which journal entries show amortisation?

Debit Amortisation expense; credit Accumulated amortisation — intangible asset.

Can you change amortisation method later?

Changes are accounting policy changes and must be justified and disclosed; retrospective application may be required.

Are loan fees amortised?

Upfront loan fees may be included in the effective interest calculation and amortised over the loan term.

How does amortisation affect profit and loss?

Amortisation reduces accounting profit by the recognised amortisation expense; it's generally a non-cash expense.

Key takeaways

Amortisation is a systematic way to recognise the cost of intangible assets over their useful life or to structure loan repayments between principal and interest. Understanding the difference between accounting amortisation (affecting profit & loss) and loan amortisation (affecting cashflow) is essential for financial planning and reporting. Always consult AASB standards, ATO guidance and a tax adviser to ensure compliance with both accounting and tax requirements.