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Reasonable and necessary business expenditures that are not completely deductible in the year incurred will be...

Reasonable and necessary business expenditures that are not completely deductible in the year incurred will be (1) depreciated, (2) amortized, or (3) capitalized. Pick one of these methods for recognizing expenses. Briefly define and provide an example of an expenditure to which it applies.

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Answer #1

Amortization:

Amortization is an accounting process, by which, the cost of an intangible asset is spread over its useful life.

An example can be the amortization of the cost of a patent.

Consider a firm owning a patent which cost it $5 million and with a useful life of 5 years.

The patent is an intangible asset and would have no value at the end of the fifth year. Hence, the cost of the patent would be written off as 'Amortization Expense-Patents' over the 5 year period, the yearly write-off being $1 million.

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