What is Amortization?

Amortization is an accounting technique used to periodically lower the book value of an intangible asset over a set period of time. It is the equivalent of depreciation for tangible assets. Intangible assets that are amortized include patents, copyrights, trademarks, and goodwill.

For Startups: For a tech startup, the cost of acquiring a patent is a significant intangible asset. Instead of expensing the entire cost at once, it is amortized over the patent's legal life. This correctly matches the cost of the asset to the periods in which it generates economic benefits for the company.

Example: A startup acquires a patent for ₹20 Lakhs with a useful life of 10 years. It will record an amortization expense of ₹2 Lakhs each year on its income statement, reducing the patent's book value over time.