Question

How is the balance sheet used to record amortization and why might it be useful as coupon payments are made?

Answer 1

A business uses amortization to spread the cost of an intangible asset over its useful life, or the life of the intangible asset in the business. An intangible asset is one without a physical presence, such as a patent. This amortization process reduces a company’s assets and stockholders’ equity on its balance sheet. Amortization is used to indicate the gradual consumption of an intangible asset over time. ... Accumulated amortization is recorded on the balance sheet as a contra asset account, so it is positioned below the unamortized intangible assets line item; the net amount of intangible assets is listed immediately below it

A more specialized case of amortization takes place when a bond that is purchased at a premium is amortized down to it at par value as the bond reaches maturity. (When a bond is purchased at a discount, the term is called accretion) The concept is again referring to adjusting value overtime on a company’s balance sheet, with the amortization amount reflected in the income statement.

A rule of thumb on this is to amortize an asset over time if the benefits from it will be realized over a period of several years (or longer). With a short expected duration (such as days or months), it is probably best and most efficient to expense the cost through the income statement, and not count the item as an asset at all.