The vernacular explanation of amortization is as follows:
Amortization is the amortization of accounts, and the basis of amortization is the accrual basis. An asset may be acquired once in the current period, but the cost of acquiring the asset should be borne by several accounting periods in the future.
For example, in order to produce goods, it costs 10 million to purchase a patent and the property right is 10 years, so it needs to be amortized every year of 1 million. Therefore, although RMB 10 million is a one-time capital expenditure, its value should be spread over the costs or expenses of multiple accounting periods in the future. After 10 years, the book value of the intangible assets will return to zero and the accounts will be written off.
Another example is purchasing fixed assets in three years, with annual payments of 5 million. Long-term payables are initially measured with a total price of 15 million for three years. Assuming that the present value of fixed assets is 14 million, the unrecognized financing cost is 1 million.
Although 1 million is the consideration for the assets acquired in this period, the interest generated by the installment purchase should be amortized within three years. The book balance of unrecognized financing expenses should not return to zero until the end of the three-year amortization, at which time the write-off is completed.
However, in the past few years, the Accounting Standards for Business Enterprises were revised and the deferred expense account was cancelled. The reason is that deferred expenses do not meet the definition of assets - "resources expected to bring economic benefits to the enterprise." Prepaid expenses are essentially a right after consumption (getting the magazine). Since consumption does not bring economic benefits to the company, it is inappropriate to put prepaid expenses in the asset category.
It should be noted that long-term deferred expenses have not been cancelled, but remain in the non-current assets account. There are two main reasons. One is based on the principle of importance. The amortization period of long-term deferred expenses is long (more than one year) and the amount is large. One-time amortization will affect the profit of the year; the second is that it is expected to bring profits to the enterprise, such as fixed Expenditures on major asset repairs and improvements are all necessary for production and operation.
The most obvious one is the start-up expenses. In the past, they could be deducted as long-term deferred expenses, but now they are directly included in the management expenses, because the expenses cannot bring benefits to the enterprise.