---
title: "What is amortization?"
description: "Amortization explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/amortization/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is amortization?

Glossary

Amortization is the accounting method that spreads the cost of an intangible asset, such as a patent, license or loan cost, over its useful life or contract term, recording a portion as an expense each period rather than all at once.

Updated September 2026

## How amortization works

Intangible assets with a determinable useful life, like a purchased patent or a capitalized software license, are amortized on a schedule similar to depreciation, usually straight-line over the term of the asset or contract. Goodwill and other indefinite-life intangibles are not amortized at all but tested periodically for impairment instead.

Loan costs and certain prepaid contract costs are also amortized, spreading them over the life of the loan or contract rather than expensing them upfront in a single period. Each period, a journal entry reduces the asset's carrying value and records amortization expense, keeping the balance sheet in line with what value genuinely remains.

## Example

A business pays $18,000 for a five-year software license. Instead of expensing the full amount immediately, it amortizes the cost evenly over the 60-month term, recording $300 in amortization expense each month. After two years, accumulated amortization totals $7,200, leaving a carrying value of $10,800 on the balance sheet for the remaining three years left on the license.

## Amortization in QuickBooks Online vs Xero

QuickBooks Online does not have a dedicated intangible amortization scheduler outside its Fixed Asset Manager add-on, so many businesses track it in a spreadsheet tied to a prepaid or intangible asset account. Xero's Fixed Assets register can be set up to run an amortization schedule for an intangible asset the same way it depreciates a tangible one.

## Common mistakes

- Goodwill is amortized on a schedule when it should instead be tested periodically for impairment, since indefinite-life intangibles are treated differently under accounting rules.
- A software license or loan cost is expensed in full immediately instead of amortized over its actual term, distorting profit in the period it was paid.
- An intangible asset's amortization schedule is not updated when the underlying contract term changes, leaving the carrying value out of step with reality.

## Why it matters

Amortization keeps the cost of intangible assets, like licences and loan costs, matched to the periods that actually benefit from them rather than dumped into profit all at once. Getting it wrong distorts reported profit and can mislead an owner or lender comparing results across periods. For businesses with meaningful intangible assets, accurate amortization schedules keep the balance sheet and income statement realistic and consistent.

## Related terms

- [Depreciation](https://ledgerbpo.com/glossary/depreciation/)
- [Fixed Asset](https://ledgerbpo.com/glossary/fixed-asset/)
- [Income Statement](https://ledgerbpo.com/glossary/income-statement/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles amortization

We track amortization schedules for intangible assets and loan costs against your chart of accounts and confirm the correct expense posts each period, so the balance sheet and income statement stay accurate and consistent.

[Asset registers and depreciation schedules kept current](https://ledgerbpo.com/services/fixed-asset-accounting/)

Next step

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Source: https://ledgerbpo.com/glossary/amortization/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt