Skip to main content
Book a free consultation

Accounting encyclopedia · Financial statements

Amortization

Amortization is the process of spreading a cost over time. In business accounting it most often means writing off the cost of an intangible asset, such as a licence or acquired rights, over its useful life. The same word also describes repaying a loan in scheduled instalments. It is closely related to depreciation, which applies to physical assets.

Sora Accounting & Tax · General information · Editorial policy
Updated · 2 min read

A licence cost recorded gradually over its term

A timeline showing the cost of an intangible asset, such as a licence, being recorded as amortization expense across its term.

Visual labels: Licence paid; Year 1 amortization; Year 2 amortization; Year 3 amortization.

Two common meanings

In financial statements, amortization usually refers to intangible assets: things with value but no physical form, such as a purchased licence, a franchise right or acquired software rights. The cost is recorded as an asset and then moved to expense over the period it is expected to benefit the business. BDC describes amortization as the broader term that covers both tangible and intangible assets, which is why you will sometimes see the two words used loosely for each other.

In lending, an amortization schedule shows how each loan payment is split between interest and principal over the full repayment period. Only the interest portion is an expense. The principal portion reduces the loan balance on the balance sheet.

An illustrative example

Suppose a company pays $12,000 for a three-year licence to use specialized software. These figures are illustrative only. It records the licence as an asset and amortizes it at $4,000 per year, or about $333 per month. After the first year the licence shows at $8,000 on the balance sheet, and the income statement carries $4,000 of amortization expense.

As with depreciation, no cash leaves the bank when the entry is recorded. The cash left when the licence was paid for.

Where tax follows a different path

The tax rules do not simply follow your accounting entries. Under the CRA’s classes of depreciable property, goodwill and certain other intangibles acquired after 2016, such as franchises, concessions or licences for an unlimited period, fall in Class 14.1 at a 5% declining-balance rate. Franchises, concessions or licences for a limited period are instead dealt with under Class 14. Whether a particular purchase fits a class is a question for your accountant.

Goodwill and other intangible assets each have their own entries in this encyclopedia.

What to discuss with your accountant

Keep the agreement or invoice for any licence, franchise or rights you buy, and note the start date and the length of the term. Ask how the useful life was chosen, whether the cost is an asset or a current expense, and how the tax treatment will differ from your books.

If you are reviewing a loan, ask for the amortization schedule and compare the interest and principal split with your bookkeeping entries. A mismatch is a common reason loan balances fail to agree with bank statements.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.