Amortization Expense is the process of spreading out the cost of an intangible asset over a period of time. This formula requires two inputs: (1) Capitalized Cost and (2) Useful Life. The capitalized cost is the purchase price of the intangible asset, minus any related sales taxes, discounts, or other adjustments. Useful life is the estimated length of time that the asset will be used to generate revenue for the business.
To calculate Amortization Expense, take the Capitalized Cost and divide it by the Useful Life. For example, if a business purchases a patent for $200,000 with a useful life of 10 years, then its Amortization Expense would be $20,000 per year ([$200,000/10] = $20,000). This amount can be used as an expense on the company’s financial statements each year until the patent expires.