Amortisation is the accounting and schedule of specific payments over a particular period of time. The meaning and application of this term is two-fold: in one, it refers to a schedule of fixed repayment (instalment) of the principal and interest of a loan over a given period of time; and in the other, it refers to the accounting practice of decreasing the value of assets to account for their declining worth over time. It is a non-cash expense that reduces a company’s tax burden.
Take for example a company that spent £100,000 on a patent that is set to expire in 10 years’ time: it amortises this expense by deducting £10,000 each year from its taxable income over the course of the 10 years.
In accounting, amortisation has the same meaning as depreciation; however, in practice, depreciation applies to tangible assets such as buildings, machinery and other equipment, whilst amortisation applies to intangible assets, such as patents, goodwill and brand equity.
Amortisation is important in a business sale because it is taken into account when using EBITDA (Earnings before interest, tax, depreciation and amortisation) in the multiplier method to determine the profitability and valuation of the business.