Which one of the following most closely defines Amortization?a)The dep...
Amortization is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. In relation to a loan, amortization focuses on spreading out loan payments over time. When applied to an asset, amortization is similar to depreciation.
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Which one of the following most closely defines Amortization?a)The dep...
Amortization:
Amortization refers to the process of allocating the cost of an intangible asset over its useful life. It is a systematic way of spreading out the cost of an intangible asset, such as patents, copyrights, trademarks, or goodwill, over its estimated useful life.
Depreciation of Intangible Fixed Assets:
Intangible fixed assets include assets that lack physical substance but have value. These assets are long-term assets that are used in the production or supply of goods or services, for rental to others, or for administrative purposes. Examples of intangible fixed assets include patents, trademarks, copyrights, goodwill, and licenses.
Depreciation of Tangible Fixed Assets:
Tangible fixed assets include assets that have physical substance and are used in the production or supply of goods or services, for rental to others, or for administrative purposes. Examples of tangible fixed assets include land, buildings, machinery, vehicles, furniture, and equipment.
Depreciation of Current Assets:
Current assets are assets that are expected to be converted into cash or used up within one year or within the normal operating cycle of a business. Examples of current assets include cash, accounts receivable, inventory, and prepaid expenses. Depreciation is not typically applied to current assets as they are either short-term or consumed within a short period.
Revaluation of Land and Buildings:
The revaluation of land and buildings refers to the process of reassessing the value of these assets based on their current market value. Revaluation is not the same as amortization or depreciation, as it does not involve the allocation of the cost of an asset over its useful life.
Explanation:
Amortization is specifically related to intangible fixed assets. Intangible assets, such as patents or trademarks, do not have a physical substance but have value. The cost of these assets is allocated over their estimated useful life through the process of amortization. This helps to accurately reflect the consumption of the asset's value over time.
Depreciation, on the other hand, applies to tangible fixed assets and refers to the allocation of the cost of these assets over their useful life. Current assets are not subject to depreciation as they are typically short-term assets or consumed within a short period. The revaluation of land and buildings is a separate process that involves reassessing the value of these assets based on current market conditions.
Therefore, option B, which states that amortization is the depreciation of intangible fixed assets, is the correct answer.
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