Businesses always seek ways to reduce expenses and maximize profits. Expense reduction sounds obstinate, but there are times when companies can spread it. One such technique used widely in the accounting world is amortization. Businesses have two amortization strategies in place, loan amortization and intangible assets amortization. Both of them are devised to get compensation at the time of paying taxes. This article will elaborate on why businesses should get these strategies right, owing to their importance. Read on to learn more!
In accounting, amortization refers to a spread of cost. It is used for either a loan (mortgage or car loan) or intangible assets. In both cases, the purpose of a business is to reduce the paying off. Amortization is the same as Depreciation; however, a slight difference is there. Amortization, when compared against Depreciation, is written off for intangible assets. In contrast, Depreciation is written off for tangible assets like property and heavy machinery. To further explore the term, let's dive into its details:
When you are paying off your debt, a certain amount will go to interest and other to the principal amount. Amortization here is used to reduce the interest payment in the installation. By reduction, we mean to reduce the balance on the current loan like a mortgage or car loan. Amortization schedules are designed to outline the paying off of the loan, denoting the numbers involved.
The term is used to spread capital expenses over the useful life of an intangible asset. When acquired, the asset is recorded as an asset in the balance sheet instead of expenditure in the income statement. The value of that particular asset is spread out annually over its useful life.
Businesses use these strategies for taxation and accounting purposes. The amount amortized will be deducted from the taxable amount, hence offering businesses an advantage at tax payment time. Owing to the importance of these strategies, companies need to do it right by joining hands with the best accounting firms in Dubai. With them on board, you will have a solid plan in place.
Amortization, in both contexts, carries several advantages for businesses of any size. From tax benefits to accounting advantages, the strategy can be of assistance. Accountants should get it right since at the end of the accounting period; its advantages will shine out. Following are some of the points which can help a company acquire a better position than its rivals.
One of the major advantages of amortization is that it tends to help businesses reduce tax amounts for a particular accounting period. You can still have the edge if you haven't paid the cash. As long as the asset is useful, you will pay lesser tax. Since the projected life of an intangible asset is longer, the advantage cant be ignored.
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Intangible assets, when acquired, are recorded as assets on the balance sheet rather than as expenses on the income statement. Even if you have not paid in cash, you can add it to the balance sheet, leaving you with more assets. Doing so will strengthen your financial position, aiding your corporate image.
As mentioned, the acquisition of intangible assets is recorded in the assets section, which reduces expenses. The amortized amount will be deducted from the taxable amount every accounting period, giving companies a slight edge. For instance, if a patent is worth $10,000, less the amortized amount of $2000, the net expense recorded will be $8000 – not $10,000. Moreover, it will leave the asset section to be debited by $10,000 at the time of asset acquisition.
Companies can use amortization as a tool to reduce tax even if they are in a higher tax bracket. As the tax bracket increases with an increase in income, businesses can amortize costs for a lesser expense show.
Read also: What are direct and indirect taxes? - explained with examples
Takeaway: A little tip here is companies should use the straight-line method instead of declining or double declining methods. The reason is a declining method will give you a steady amount to be deducted at the end of each year. Doing so will keep the streak alive for reduced taxation as long as the asset lives. Companies can slip off the track here if not advised by experts. Hire the services of the best accounting firms in Dubai to make the most out of these tricks.
The services of experienced accounting professionals are helpful in the quest of earning a higher business performance. Not all businesses can win without expert advice, not today at least. Companies need to take them onboard to ensure business growth in the long run.
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