Amortization
Definition
Spreading the cost of an intangible asset, like software development, a trademark or a purchased customer list, over its useful life. The same word also describes paying down a loan in scheduled installments.
Want a deeper explanation?
Formula
Annual Amortization = Cost of Intangible Asset ÷ Useful Life (years)Amortization does for intangible assets what depreciation does for equipment: it matches the cost to the years that benefit from it, so one big purchase does not distort a single month.
It is a non-cash expense, which is why it is added back in EBITDA. Watch for: large software, website or brand purchases expensed all at once, which understates profit in that year and overstates it later.
Example
You pay $30,000 for a custom Shopify app expected to last 3 years. You record $10,000 of amortization expense each year instead of $30,000 at once.