What is amortisation?

An amortising loan has a fixed periodic repayment worked out so that the principal and interest are fully repaid over the number of payments in the term. Each period the interest is calculated on the outstanding balance, the rest of the repayment comes off the principal, and the new balance carries into the next period.

Because the balance is highest at the start, early repayments are interest-heavy and later repayments clear more principal. An amortisation schedule sets this out payment by payment, which helps a business budget its cash outflows and supports decisions about refinancing, early repayment or comparing rates. Upfront loan fees may be included in the effective interest calculation and amortised across the term.

In accounting, amortisation is the expense recognition process for intangible assets under AASB 138 (IAS 38). It applies to purchased software licences, capitalised development costs, patents, copyrights, franchise agreements, and customer lists or contracts with a determinable life. Straight-line is the most common method: cost less residual value, divided by useful life, with many intangibles assumed to have zero residual.

Each period the bookkeeper debits amortisation expense in the profit and loss and credits accumulated amortisation, a contra account on the balance sheet. The asset then shows at cost less accumulated amortisation, its carrying amount. Goodwill and indefinite-life intangibles are not amortised but tested for impairment.

Accounting amortisation and tax deductions can differ in both timing and eligibility. An amortisation expense recognised in the accounts is not automatically a tax deduction, and it may not be deductible in the same period. The ATO's rules on depreciation and capital allowances decide what can be claimed and when.

Amortisation is generally a non-cash expense, so it reduces accounting profit without reducing cash. Check with the ATO or your accountant before relying on the accounting figure for tax.