Short definition: Amortization is the process of spreading out the cost of an intangible asset over its useful life.
Explanation: It is similar to depreciation, but it applies to intangible assets such as patents, copyrights, trademarks, and goodwill. Amortization is a non-cash expense that is recorded on the income statement and reduces a company’s taxable income.
Example: A company acquires a patent for $1 million with an estimated useful life of 10 years. Using the straight-line method, the company would amortize the patent by $100,000 each year ($1 million / 10 years).
Additional information (optional): Amortization is an important accounting concept for companies with significant intangible assets, as it allows them to spread the cost of these assets over their useful life, rather than expensing them all at once.