Amortisation spreads the cost of an intangible asset, such as software or a patent, over its useful life; it is depreciation's counterpart for intangibles.
Amortisation is the accounting practice of spreading the cost of an intangible asset - software, a patent, a licence, a trademark - over its useful life, instead of expensing the whole purchase in the year it happened. It is the intangible twin of depreciation: both turn one big purchase into a series of smaller annual costs that match the years the asset is actually used. Amortised assets sit on the balance sheet alongside physical equipment in the fixed asset register, losing a slice of book value each year.
Amortisation vs depreciation
The mechanics are near-identical; the asset type differs. Depreciation covers things you can drop on your foot - vans, machinery, laptops. Amortisation covers things you cannot: rights, licences, and other intangibles.
Two practical differences follow. Amortisation is almost always straight-line - equal amounts each year - because intangibles rarely have a meaningful pattern of physical wear. And intangibles are usually assumed to be worth nothing at the end: a five-year-old delivery van has a resale market, an expired licence does not, so the residual value is normally taken as zero.
What gets amortised
- Perpetual software licences - bought outright rather than subscribed to; by far the most common amortised asset in small businesses.
- Patents, copyrights, and trademarks - amortised over their legal or useful life, whichever is shorter.
- Operating licences and franchises - the right to run a route, sell a brand, or operate in a regulated market.
- Acquired intangibles - customer lists or brand value bought as part of an acquisition.
What does not get amortised: monthly SaaS subscriptions (expensed as ordinary operating cost - nothing lasting was bought), and small one-off purchases below the capitalisation threshold, which are simply expensed regardless of type.
A worked example: a software licence
A company buys a perpetual design-software licence for €6,000 and expects to use it for three years. Straight-line amortisation gives €6,000 / 3 = €2,000 per year. After year one the licence’s book value is €4,000; after year two, €2,000; after year three it is fully amortised at zero - though the company may keep using it for as long as it remains useful.
If the software became unusable early - say the vendor ends support in year two - the remaining book value would not quietly tick on; it would be removed through an impairment or an asset write-off.
The other amortisation: loans
The same word also describes repaying a loan in instalments, where each payment covers that period’s interest plus part of the principal. A loan “amortisation schedule” shows the interest/principal split shrinking and growing over the term. The two meanings share one idea - spreading an amount over time - but the loan sense belongs to financing, not asset accounting. If a search led here from a mortgage context, that is the meaning you want.
Amortisation in practice
The recurring small-business failure is not the arithmetic - it is losing track of which licences exist, what they cost, and when they were bought, so year-end becomes a hunt through old invoices. Keeping licences in the same register as the hardware they run on, with purchase date, price, and expected useful life on each record, makes the schedule a five-minute job. AMPthilly’s register holds digital assets such as software licences alongside physical equipment, with purchase price, dates, and expected useful life per record and CSV export for finance.
Related terms
- Capitalisation Threshold - the cost line below which purchases are expensed, not amortised
- Fixed Asset Register - where amortised intangibles live alongside depreciated equipment
- Impairment - the write-down when an intangible loses value ahead of schedule
- Residual Value - the end-of-life value, usually zero for intangibles
- Asset Write-Off - removing a dead asset’s remaining book value entirely