# How to calculate amortization expense?

Since finite life intangible assets are capitalized onto the balance sheet at the acquisition/purchase price, that amount represents the capitalized cost base to amortize. Assuming the straight-line method is used, the company divides the capitalized cost by the estimated useful life, and that gives you the amortization expense per year to recognize in the financial statements.

Similar to depreciation, amortization is a non-cash expense, so there is no cash flow impact. Amortization is added back to calculated reported EBITDA.

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• ### How to Calculate Amortization for Intangible Assets:

Amortization of intangible assets is essentially the same concept as depreciating physical (tangible) assets. If the intangible asset has a finite life (meaning the useful life of the intangible assets has a definitive end) then the company would amortize the intangible asset over the lesser of its estimated useful life (sometimes referred to as its economic life) or its legal life. Keep in mind, it is only intangible assets that have been capitalized to the balance sheet that will be amortized. Intangible assets that are internally developed, will be expensed to the income statement, and thus, no amortization will be necessary. The CPA exam will require that you know the fundamental differences in when intangibles assets are either capitalized or expensed. For example, if the company acquires a trademark worth \$100,000 that has a useful life of 10 years, then after 10 years, the net book value of the trademark would be \$0. In addition, the company would record an amortization expense of \$10,000 per year (\$100,000 ÷ 10 years). The below example outlines the journal entry requirements for the initial acquisition of an intangible asset (capitalized to the balance sheet), and the succeeding amortization expense entries. Keep in mind, the purchased intangible asset will first be recorded at its acquisition price of \$4,000,000. This asset will then be amortized by the lesser of its estimated useful (economic) life and its estimated legal life.

• ### Why is depreciation and amortization expense considered a non-cash expense?

Depreciation and amortization are considered to be a non-cash expense because the company does not have an actual cash outflow for those expense. Depreciation and amortization are recorded to reduce the taxable income for a company. As you can see below, there is no cash outflow when depreciation expense is recorded.