Amortisation is a similar process to Depreciation; however, it deals with the process of spreading the cost of an intangible asset over its useful life rather than a tangible asset.
Intangible assets are assets that do not have a physical form, such as patents, trademarks, software and copyrights. The cost of an intangible asset is spread out over the years in which it is expected to be used, rather than being expensed all in the year the asset is acquired. Amortization is a way of matching the cost of an intangible asset to the income it generates.
For example – imagine that a company hired 3 software engineers to develop an application to help run their business, the developers were paid £400,000 in total over a period of 2 years and then the application was launched, It would be reasonable for the business to consider the £400,000 paid to the developers to be the cost of the application, and instead of reflecting the developers salaries in the overheads section of the P&L they could move it to the balance sheet as an asset. The value of the asset would be considered to have a set lifetime and it could then be depreciated over that period, however, rather than depreciation this cost is called ‘Amortisation’.
