Amortization occurs when the value of an intangible asset – i.e. customer lists, licensing agreements, service contracts, computer software and etc – is reduced over a specific time period, which is usually over the asset’s estimated useful life.

A good way to think of this is to consider amortization to be the cost as the asset is consumed or used up while generating sales or profits.

Major issues of the amortization process include useful life, residual value and the allocation method, the last of which can be on a straight-line basis that is mostly straightforward.

A rule of thumb on this is to amortize an asset over time if the benefits from it will be realized over a time period of several years.

With a short expected duration, it is probably best and most efficient to expense the cost through the income statement.

Also, amortization refers to capitalizing the value of an intangible asset over time.

Depreciation, on the other hand, is meant to refer more to capitalizing the value of a tangible asset over time; for example, a piece of equipment, a vehicle or office furniture that a company might purchase.