Types of Accounts in Accounting and How Amortization Affects Them
Understanding the different types of accounts in accounting is essential for anyone learning about finance. These accounts form the base of all financial records. But accounting isn’t just about keeping track of money—it’s also about how costs are spread over time. That’s where amortization comes in.
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Types of Accounts in Accounting
In accounting, all financial transactions fall under five main types of accounts. Each has a specific role in maintaining an organization’s financial records:
- Assets: These are things the business owns, such as cash, equipment, or buildings.
- Liabilities: These are what the business owes to others—loans, unpaid bills, or other obligations.
- Equity: This is the owner’s claim on the business after subtracting liabilities from assets.
- Revenue (Income): Money the business earns through sales or services.
- Expenses: Costs involved in running the business, like rent, salaries, or utility bills.
Each financial transaction impacts at least two of these accounts in what’s known as double-entry bookkeeping.
What Is Amortization in Accounting?
Amortization is the process of spreading out the cost of an intangible asset (like patents or trademarks) or certain liabilities (like loans) over a set period. It helps businesses match the expense of an asset or liability to the time period it benefits.
Unlike depreciation (used for physical assets), amortization deals with intangible assets or the gradual repayment of loans.
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How Amortization Affects Accounting Accounts
Amortization mainly affects two types of accounts:
- Asset Accounts: Amortizing intangible assets like trademarks over their useful life reduces their value and adds a recurring expense.
- Liability Accounts: Amortization helps track how loan repayments split between interest and principal, impacting both liabilities and expenses.
Different Amortization Methods
- Straight-Line Method: Divides the cost equally across the useful life.
- Reducing Balance Method: Higher amortization in early years, decreases over time.
- Annuity Method: Keeps total payments the same while adjusting principal and interest portions.
- Bullet Method: Pays only interest until the principal is repaid as a lump sum at the end.
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How Do You Calculate Amortization?
Amortization = (Initial Value of Asset or Loan – Residual Value) / Useful Life
For example, if a company purchases software worth ₹60,000 with no salvage value and a 3-year useful life:
Amortization per year = ₹60,000 / 3 = ₹20,000
This amount is recorded annually as an expense, reducing the book value of the asset.
To simplify this calculation and recording, many businesses rely on cloud accounting software.
Conclusion
By understanding the different types of accounts in accounting, you can see how financial transactions shape a business’s health. Adding amortization to this knowledge gives you a clearer picture of how businesses manage long-term costs.
Whether dealing with intangible assets or loan repayments, knowing how amortization works—and how to calculate it—helps keep your accounts accurate and your books in good shape.
I am a Chartered Accountant with more than five years of experience in the accounting field. My areas of expertise include GST, income tax, and audits. I am passionate about sharing knowledge through blogs and articles, as I believe that learning is a lifelong journey. My goal is to provide valuable insights and simplify financial matters for individuals and business owners alike.
