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    #1

    amortize

    Hi,

    What does this sentence mean?


    The value of the machinery is amortized over its estimated useful life.


    Thanks a lot


  1. Ouisch's Avatar
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    #2

    Re: amortize

    Instead of listing the full value of the machine on the financial statement during the quarter in which it was purchased, the value of the machine is instead spread out over the period of time the machine will actually be in use.

    For example, your company buys a $10,000 printing press in December 2010. Instead of listing the value of the printing press as $10,000 on the company's year-end financial statement for 2010, your accountant will amortize the value: the press is expected to be in use for the next 10 years, so the accountant divides $10,000 by 10 and then lists a value of $1,000 for the press on each year's financial statement until 2020.

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    #3

    Re: amortize

    I am sorry, I still don't understand.

    According to my notebook, "amortize" means almost the same as "installment", but I still have problem understanding the example sentence:

    The value of the machinery is amortized over its estimated useful life.

    Let's say the value of the machinery is $10,000 and the money will be paid, for example, in the amount of $1,000 within X years. But how to understand "its estimated useful life", does it mean, if the "estimated useful life" is five years, the money will be paid within 5 years?

    Thanks a lot

  2. Ouisch's Avatar
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    #4

    Re: amortize

    Quote Originally Posted by Silverobama View Post
    I am sorry, I still don't understand.

    According to my notebook, "amortize" means almost the same as "installment", but I still have problem understanding the example sentence:

    The value of the machinery is amortized over its estimated useful life.

    Let's say the value of the machinery is $10,000 and the money will be paid, for example, in the amount of $1,000 within X years. But how to understand "its estimated useful life", does it mean, if the "estimated useful life" is five years, the money will be paid within 5 years?

    Thanks a lot
    Amortization has nothing to do with paying for the machine. It has to do with the way the cost or value of the machine is reported on the company's financial statement. It affects the way the company's profits and losses appear on paper.

    If the machine's estimated useful life (that is, how many years it will be operational) is 10 years, and the total cost was $10,000, you can amortize the value and show it as $1,000 on your financial statement every year for 10 years, rather than showing the full value of $10,000 on the statement at the time the machine was purchased.

    This method is used in order to show a profit at the year end. When the financial statement is prepared, it lists the total sales as well as the total expenditures. If sales for 2010 were only $9,000 and you show the purchase of a $10,000 machine in 2010, your year-total will be a negative amount (-$1,000) and you won't show any profit. If you amortize the cost of the machine over 10 years, then the purchase amount will be listed as $1,000. Deduct the $1,000 cost from the $9,000 in sales, and you are now left with a profit of $8,000. Of course, you will have to list a cost of $1,000 for the machine next year on the 2011 statement, and again in 2012, etc., for the next 10 years. Companies do this to avoid showing negative balances on their profit/loss sheet at the end of the year; it looks better to potential investors, bankers, etc., to always show a profit. In reality, you paid the entire $10,000 in 2010 and actually did suffer a loss, but on paper - on your official financial statement - you made a profit.

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    #5

    Re: amortize

    I believe that another possible use of amortise is this:

    The value of the machine is recorded in the assets side of the accounts. In the first year, the value is recorded as the purchase price. If the machine's useful life is estimated at ten years, then the value of the machine in the accounts will be reduced by 10% each year. So at the end of the ten years, when it has to be replaced, its value as an asset will be recorded as zero.

    Please note that I am not an accountant.

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    #6

    Re: amortize

    Quote Originally Posted by fivejedjon View Post
    I believe that another possible use of amortise is this:

    The value of the machine is recorded in the assets side of the accounts. In the first year, the value is recorded as the purchase price. If the machine's useful life is estimated at ten years, then the value of the machine in the accounts will be reduced by 10% each year. So at the end of the ten years, when it has to be replaced, its value as an asset will be recorded as zero.

    Please note that I am not an accountant.
    I think that is "depreciation" and relates to how much taxes you have to pay on your equipment.

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    #7

    Re: amortize

    Quote Originally Posted by SoothingDave View Post
    I think that is "depreciation" and relates to how much taxes you have to pay on your equipment.
    Thank you. I had used 'depreciation' that way in my own business, but I thought it was possible to use 'amortization' as well. Apparently not, for tangible assets, but it sems that it is possible for intangible assets: Amortization (business) - Wikipedia, the free encyclopedia

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    #8

    Re: amortize

    Quote Originally Posted by fivejedjon View Post
    Thank you. I had used 'depreciation' that way in my own business, but I thought it was possible to use 'amortization' as well. Apparently not, for tangible assets, but it sems that it is possible for intangible assets: Amortization (business) - Wikipedia, the free encyclopedia
    I was trying to keep the explanation as simple as possible (no small feat when discussing accounting matters), so I left out phrases like "tangible" and "intangible" and even "assets." This discussion has piqued my curiosity, so I investigated further and found this definition in the Online Cambridge Dictionary: "Amortize: to reduce a debt by paying small regular amounts." Maybe "amortize" has a different meaning in BrE, or maybe the editors incorrectly over-simplified the term, because the example given on that web page - The value of the machinery is amortized over its estimated useful life. - in no way describes the method of paying a debt in regular small amounts in AmE. If you purchase something on credit in the US and agree to pay for it in monthly installments, you usually have to keep paying those monthly installments even if it stops working long before its "estimated useful life." That's the key phrase that differentiates this from a loan or credit card charge or other purchase that is paid in small monthly installments - when the monthly payment on such a purchase is determined it has nothing to do with the "useful life" of the item purchased, the amount is determined simply by dividing the total purchase price by the number of months the lender is allowing the buyer to pay it in full.

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    #9

    Re: amortize

    Quote Originally Posted by Ouisch View Post
    Amortization has nothing to do with paying for the machine. It has to do with the way the cost or value of the machine is reported on the company's financial statement. It affects the way the company's profits and losses appear on paper.

    If the machine's estimated useful life (that is, how many years it will be operational) is 10 years, and the total cost was $10,000, you can amortize the value and show it as $1,000 on your financial statement every year for 10 years, rather than showing the full value of $10,000 on the statement at the time the machine was purchased.

    This method is used in order to show a profit at the year end. When the financial statement is prepared, it lists the total sales as well as the total expenditures. If sales for 2010 were only $9,000 and you show the purchase of a $10,000 machine in 2010, your year-total will be a negative amount (-$1,000) and you won't show any profit. If you amortize the cost of the machine over 10 years, then the purchase amount will be listed as $1,000. Deduct the $1,000 cost from the $9,000 in sales, and you are now left with a profit of $8,000. Of course, you will have to list a cost of $1,000 for the machine next year on the 2011 statement, and again in 2012, etc., for the next 10 years. Companies do this to avoid showing negative balances on their profit/loss sheet at the end of the year; it looks better to potential investors, bankers, etc., to always show a profit. In reality, you paid the entire $10,000 in 2010 and actually did suffer a loss, but on paper - on your official financial statement - you made a profit.

    Thanks a lot again. But if you can use a word to replace "amortize" in the sentence, which simple word can you use?

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    #10

    Re: amortize

    Quote Originally Posted by Silverobama View Post
    Thanks a lot again. But if you can use a word to replace "amortize" in the sentence, which simple word can you use?
    "Amoritize" is the simple word. It's a concept. That's the word for it. Someone reading the material would either know what the word means or have to go look it up.

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