Amortization is – In accounting you could say that an asset is a resource with economic value that has its own economic value. Assets can also be owned by individuals, companies or countries with the hope that they will be able to provide some benefit in the future.

Even so, there is a condition that causes the value of the purchased asset to be not as fixed as when it was first purchased. The condition for measuring asset values ​​in the world of accounting is commonly known as amortization.

Definition of Amortization

The first thing we will discuss is the meaning of amortization. Although previously explained briefly, at this point will be explained more broadly related to the meaning of amortization.

Amortization is an accounting technique that is usually used periodically to reduce the book value of a loan or intangible asset over a certain period of time. In addition, amortization can also be interpreted as a decrease or reduction in intangible assets for each accounting period that has previously been passed by the company.

The simplest example of amortization is the process of paying monthly bills for vehicle loans, credit card loans and others. The amortization procedure actually has its own method of calculation.

Even so, the distinctive feature of the amortization calculation is that the installment number must be greater than the principal loan and also the interest expense that will be borne by the borrower. With this formula, slowly the amortization value will be paid off in every installment payment process that is made.

Amortization Calculation Method

As previously explained, amortization is a method commonly used to reduce intangible assets in each accounting period of a company. Even so, the amortization calculation process will be carried out haphazardly.

There are specific methods that companies must follow in the amortization calculation process. Basically, the amortization calculation method is already in Law Number 17 of 2000 concerning the third amendment to Law Number 7 of 1983 concerning Income Tax

It should also be noted that each amortization calculation method has different ways of working and benefits. Therefore, the task of the company and the PIC is to understand the needs and financial resources they already have.

The following is an explanation regarding the amortization calculation method which you can read in full.

1. Straight Line Method

The straight-line method is a technique that can be used in amortization calculations. Where the straight-line method will drive a system of cost allocations whose total will be budgeted each year in the same amount. In fact, you could say that the straight-line method is a cost value with a relatively stable amount of depreciation in each accounting period.

2. Declining Balance Method

The declining balance method can also be used as an amortization calculation method. In the declining balance method, the cost allocation system with the budgeted amount will decrease every year as the utilization mass of the asset increases.

In the last year of the useful life there will be a decrease simultaneously with the value of the remaining book. Not only that, in the declining balance method, usually the year the depreciation fee is acquired will be much larger, which in the following year the cost will be even smaller.

The difference between Amortization and Depreciation

Not only amortization, but there is also the term depreciation which relates to the process of reducing the useful value of an asset. Even so, both amortization and depreciation have differences, you know .

If amortization is a decrease in the value of intangible assets, then depreciation is a decrease in tangible assets. Then, amortization shows the value of assets in a company when it will be resold and for depreciation is to allow a company to generate and maintain the existence of income from these assets in a certain period.

Therefore, both amortization and depreciation can be said to have a long-term impact related to the value of a company’s assets. In order to be able to easily manage company assets and be able to measure the value of depreciated assets, you can use an asset management application.

With the help of this particular application, you will find it easier to track asset information in more detail and be able to create an asset value report with the relevant metrics. Of course, this will make it easier for you in the process of managing company assets.

How to Perform Amortization Calculations

Amortization is an activity that requires a company to process debt payments. The debt includes principal repayments as well as interest payments.

The purpose of the principal loan is the forest balance that must be outstanding and must be repaid by the company’s management. Interest payments on these debts will continue to decrease when the principal amount paid becomes greater.

In fact, the longer the amount of interest to be paid also runs out. Even so, the amount of principal payments can actually increase. In order to be effective again, there are about six stages needed in the amortization payment process that can be carried out by a company.

Here are six amortization calculation steps that you can use.

1. Collect Data

The first step a company can take in the amortization calculation process is to collect data. This data will be needed so that the company can start calculating the first amortization. Some of the data that companies can collect is interest rates, loan tenors and loan principal.

2. Prepare Working Papers

After the required data has been collected, the company can start preparing working papers in the amortization calculation process. This working paper is needed so that the amortization calculation process becomes easier to execute.

It is undeniable that advances in technology will also provide convenience for companies in the amortization calculation process. Currently, there are many applications that can be used to perform amortization calculations.

In fact, with the help of Microsoft Excel alone, you can fill in tables with data such as months, principal installment interest, interest installments, installment amounts and loan balances.

3. Determining Loans

Next is to determine the loan. The company is required to determine the loan in the previous period and calculate the number of existing installments. Meanwhile, the formula used in the process of calculating the company’s installment amount is as shown below.

Installment Amount = P x (i/12) / 1 – (1+(i/12)-t)

Information:

P: loan principal
i: interest rate
t: loan tenor.

4. Perform Interest Installment Calculations

Next is the stage of calculating the amount of interest installments. To be able to calculate interest installments also needed a formula. Below is a formula for calculating interest installments that can be done by the company.

Formula:
The loan principal in the previous month minus the interest rate multiplied by 30/360

5. Identify the installments that must be paid

The next process that can be needed in the amortization calculation is to obtain information related to the principal installments that need to be paid by the company. To make it easier to identify the installments that must be paid by the company, you can use the formula provided below.

Formula:
Total installments – interest installments

6. Perform Loan Balance Calculations

The last step a company can take in calculating the amortization amount is to calculate the loan balance. Just like the previous point, calculating the loan balance also requires a formula. So, the formula used in calculating the loan balance is as follows.

Formula:
The principal amount of the loan in the previous month – the principal installment amount

Those are six easy steps that can be used when you want to do an amortization calculation.

Amortization Benefits

Amortization is an important aspect of business accounting. By using amortization, companies can get a surefire way to be able to predict the financial statements they have.

Not only that, because amortization can provide information to companies related to the debt they have. Interestingly, the existence of amortization is not only able to provide these two benefits, but also has several other benefits as shown below.

1. Provide clear information on the amount of payment which includes interest to the principal loan.
2. Provides information in the form of debt and interest payment schedules in a more structured manner.
3. Provides a tax deduction process in the current tax year.
4. Provide clearer and more structured financial report information.
5. Reducing the risk of accumulating business debt.

So, those are some of the benefits provided by amortization to a company. With these benefits, amortization is an important aspect required by the company.

Example of Amortization Utilization

As explained if amortization is required by the company. Some examples of the use of amortization are as follows.

1. Vehicle loan monthly bills
2. Mortgage loans
3. KPA loans
4. Credit Card Loans

When is the Amortization Calculation Time?

Calculation of amortization of intangible assets can begin in the month of issuance except for certain business fields which are regulated in the Regulation of the Minister of Finance Number PMK 248/PMK.03/2008 as stated below.

1. Forestry business sectors such as forest business sector, forest areas and planted forest products that can be carried out in a production process repeatedly and only produce results after the planting process is more than one year.
2. The tree plantation business sector is like the plantation business sector where the plants can be produced repeatedly and only produce after the planting process has been more than one year.
3. Livestock business sectors such as the livestock business sector where livestock can be produced repeatedly and can only be sold after maintenance has been carried out for at least one year.

Amortization of expenditures to acquire intangible assets and other expenses for certain business fields begins in the month of commercial production or the month in which sales have already started.

Overview of Depreciation

The previous explanation has been explained regarding the difference between amortization and depreciation, both of which provide calculations for assets but in different forms. At this point, we will study more broadly related to depreciation.

Depreciation is a method of depreciation in accounting that can affect the value of a company’s assets, especially fixed assets. The more the decline in the value of fixed assets, then this will be able to lower the selling price of the asset.

Meanwhile, the fixed assets themselves are fixed assets that refer to long-term assets and are useful for the company to be able to carry out its business operations. Buildings, factories, tools, production machines and transportation equipment such as cars and motorbikes are examples of fixed assets. However, land is an exception, because land value cannot be counted as depreciation. This is because land assets will have a higher value over time.

Depreciation or depreciation can have an effect on the value of fixed assets because it can reduce the value on the balance sheet due to depreciation. This can also affect net income because it is considered a cost and also an expense in finance.

Please note that the calculation of depreciation is only applied to tangible fixed assets. Intangible fixed assets such as trademarks, licenses, copyrights, franchises and others are not included as fixed assets that can be calculated in depreciation.

So why is the calculation of the depreciation value so important for the company?

This is related from various aspects. If we do not calculate the depreciation value, it will allow a loss for a company. Losses that might occur are in inappropriate taxes or can be much larger than recording non-decreasing profits in the absence of calculating depreciation or depreciation costs.

Factors Affecting Depreciation

Depreciation or depreciation of the value of tangible assets in a company can also be influenced by several factors. Well, several factors that can affect the value of an asset are as follows.

1. Acquisition Cost Factor

The amount of funds obtained is the basic cost of calculating the amount of depreciation which will later be allocated per certain accounting period. These costs are the main factor that can determine how much depreciation of fixed assets occurs. Costs included in the cost of acquisition are such as the purchase price of the asset, shipping or transportation costs as well as entry and installation costs.

2. Estimated Economic Age

After knowing the acquisition cost. Next is to find out the estimated economic life of each fixed asset. The economic life factor of an asset is also included in the list of factors that can affect the depreciation of an asset.

Estimates of economic life can be known from estimates of how long a tangible asset can be useful in the operational production process. For example, for how long, it can range from months or years to a decline in production quality.

A smaller depreciation will have a longer life. Whereas when there is a greater depreciation, the economic life of the asset will be classified as shorter. Therefore, it is very important for a company to know the estimated economic life of an asset from the start.

3. Estimated Residual Value

The final determining factor for depreciation calculations is the estimated residual value of an asset. The value that can be realized when an asset will be sold or no longer used again is the residual value.

Not only that, residual value can also be interpreted as the residual value of an asset resulting from sales, leasing or rotation in accordance with the maintenance of business policies. Even so, if a fixed asset cannot be used anymore because it cannot provide benefits again, then the asset does not have a residual value that is too high.

So, that’s a review of amortization and a glimpse of depreciation, which you can read in full here. After reading this article to the end, I hope all the discussion will be useful for Sinaumed’s.

If, you want to find various kinds of books about accounting, then you can find them at sinaumedia.com . To support Sinaumed’s in adding insight, sinaumedia always provides quality and original books so that Sinaumed’s has #MoreWithReading information.

Definition of accumulation – Accumulation is a periodic addition, for example returns or deposit interest . Have you heard the term accumulation? You may often encounter the word accrual when saving or buying items with rewards and points that can be accumulated. However, you still don’t know what accumulation is. Check out the following explanation.

Definition of Accumulation

According to the Big Indonesian Dictionary, accumulation is defined as collecting, hoarding, accumulating; as capital. In another sense, in general, accumulation is the activity of accumulating something for the purpose of generating higher returns in the future.

In economics, accumulation is the periodic addition of capital from interest or other sources to principal to create more output or income in the future. In general, accumulation refers to the acquisition or getting of something with the same goal, i.e. greater success in the future.

A simple example of accumulation practice is when buying an item. Usually when you shop, there will be offers to buy by collecting points and rewards . Later it will be accumulated and exchanged for a number of products with certain achievements.

Types of Accumulation

1. Capital Accumulation

Capital accumulation is an activity that aims to achieve greater income or production in the future by saving part of the income and then reinvesting it.

The profits can be in the form of interest, profits, rent, capital gains , royalties or other types of benefits.

Capital accumulation focuses on increasing existing wealth through profitable investments and savings. This investment is concentrated in various ways throughout the economy. One method of capital growth is the purchase of tangible goods that stimulate production.

This activity is the basis of the capitalist economic system, in which all economic activities are planned and prepared to raise capital. In other words, all investments are made to achieve financial gain.

Capital accumulation can include physical assets such as machinery, labour, research and development which can increase production. In financial assets, capital accumulation can include stocks and bonds. Another important factor in capital accumulation is price appreciation.

Measure capital accumulation

Measurement of capital accumulation is done by calculating or measuring changes in asset values. For businesses, they will consider reinvesting profits back into the business.

Depending on the type of business, this could be investing in tangible assets or human capital, and then determining the added value of that reinvestment. The capital structure and capital strength of a company can be determined by analyzing its financial statements.

In Marxist economics and accounting, capital accumulation is often seen as an investment in the form of income or savings. This is especially true for the real means of production. The result of capital accumulation is centralization and centralization.

For economic growth, it is often necessary to accumulate capital, both financial and non-financial, because more capital is required for additional production to increase the scale of production.

More productive and wiser organizations can even increase their output without spending more capital. Capital creation does not always require additional investment. This can be done by improving the organization or by inventions that increase productivity, increase real estate sales, etc.

As an example :

companies that want to increase production capacity to boost economic growth in the short term. The method used is to increase physical capital to produce goods and services through bank loans or by issuing capital as a source of funding.

The relationship between capital accumulation and the economy

In the Harrod-Domar model of economic growth , an increase in the saving rate allows for more investment. This ultimately leads to higher rates of economic growth in the short and medium term.

The answer is still controversial. Some economists, such as Solow, argue that increasing capital does not lead to long-term sustainable growth, as the Solow growth model proves.

Instead, the rate of growth is determined by the rate of population growth and the rate of technical (technological) progress. Indeed, the ratio of capital to labor is assumed to experience a marginal downward trend.

When the ratio of capital to labor is high (as in developed countries), the contribution of additional capital to economic growth is relatively small compared to when the ratio of capital to labor is low, as in developing countries.

One example of capital accumulation

The Government of the Republic of Indonesia intends to increase domestic food production by increasing farmers’ vegetable production. First, the Indonesian government is investing in infrastructure in the form of road construction.

In addition, the government is investing again by providing new tractors to farmers. Investing in road construction and buying new tractors for farmers is to accumulate capital for the Indonesian government so that future vegetable production will be abundant and national food production will increase. This is in accordance with the accumulation goal to achieve great results in the future.

2. Parking Accumulation

Parking accumulation is the total number of vehicles at a given location. This parking space accumulation information is needed to control and plan parking space requirements in an area.

Parking accumulation information surveys should be carried out to obtain a history of vehicles parked at any given time. Parking varies depending on the location of the business with parking/buildings, such as offices, shopping centers and apartments.

Parking accumulation survey

To obtain parking accumulation information, it is necessary to conduct a survey to obtain the history of parked vehicles in a day, the highest achievement level of the number of parked vehicles is called the highest parking accumulation.

This amount varies depending on the event with parking/building. Offices peaked during the day, while the accumulation of shops/malls during the week was lower than the weekend accumulation in the afternoon, and the accumulation of housing/apartments at night.

Great accumulation

The amount of accumulated parking is given by the following formula:

Where:

AP is accumulated parking

Ei is the number of vehicles that enter the parking lot

Ex is a lot of vehicles leaving the parking lot

If there were cars previously parked in the lot, then there are lots of cars so the cumulative number present is added to the parking lot.

The vehicles that are inside are occasionally there. Because the vehicle arrived before the inspection or there was a damaged vehicle that was left overnight by the owner.

Where :

N = the number of vehicles that existed before

When carrying out the survey

When conducting a survey, it depends on the type of event where the survey is implemented, such as in the office, the event is dominated during working hours, at the market in the morning, schools at the entrance and after school, lodging/apartments at night.

3. Accumulated Fees

Cost accumulation is a method used to determine the total cost of a service or product. There are two types of accrued expenses, namely:

Order Cost Accumulation

Order costing is a method used to aggregate the cost of a product in which costs are aggregated for each separate order or contract or service and each order or contract can be segregated on the basis of its identity.

This cumulative ordering cost can be applied to companies using discontinuous manufacturing processes such as; construction work, workshops, printing, catering, furniture , etc.

Process Cost Accumulation

Process cost accumulation is a method for aggregating product costs by aggregating costs for each specific unit of time. This process cost accumulation can be applied to companies that use continuous production processes, such as; auto assembly companies, pharmaceuticals, airlines, hospitals, etc.

Both an actual costing system and a predetermined costing system can be used in order and process costing.

4. Accumulated Depreciation

Accumulated depreciation is an accounting term that refers to the decline in value of an asset due to its use over a period of time. Examples include buildings, mining equipment, and office electronics such as laptops and printers.

In the financial statements there are two values ​​of depreciation, namely depreciation expense and accumulated depreciation. Depreciation costs are the calculated use or benefits of capital assets.

Meanwhile, accumulated depreciation is a collection of periodic depreciation expenses. The two are also different in financial recording, where the depreciation expense must be recognized in the income statement and the accumulated depreciation must be recorded in the balance sheet.

The accumulated depreciation in the first year of use of fixed assets is the same as the depreciation in the first year of use of fixed assets. Then, in the second year of use, the accumulated depreciation is the result of the total depreciation of fixed assets in the first and second years. The same goes for the third year and so on.

In financial statements, the essence of accumulated depreciation is to reduce the value of fixed assets. Use automated accounting applications to support real-time and efficient business financial reporting.

Variables in Accumulated Depreciation Calculations

Acquisition Fee:

costs incurred by the company to purchase fixed assets, including the purchase price plus various other costs, such as transportation, installation, assembly, etc.

Residual value:

Estimated or residual value of fixed assets after use. This residual value is not fixed, so fixed assets have no residual value. This is because when the withdrawal deadline arrives, it is not always possible for the asset to be sold and left alone.

This is of course not recommended. It would be better if idle assets were sold or recycled, to extend their value function.

Book price or historical value:

The price at the time of acquisition of the asset, is the acquisition cost by deducting the accumulated depreciation of fixed assets over the economic life of the fixed assets.

Economic age:

Estimated useful life of fixed assets or useful life of fixed assets. It is divided into two, namely physical age and functional age.

Age indicates that the condition still looks good even though its function has decreased. Meanwhile, functional age is related to the usefulness of an asset. Assets serve a lifetime if they are still active and able to contribute to the business.

Shrinkage Type

depreciation

Depreciation is a widely used method and is similar to the straight-line method in terms of depreciation. The trick is to do a systematic sum and then divide the useful life of the asset.

Usually, this depreciation is applied to assets that have different physical forms, such as computers, laptops, cars, motorbikes, furniture, printers, production machines, machines, copiers, and many other assets.

Amortization

Unlike depreciation, the amortization method can be applied to a variety of intangible assets, such as patents, trademarks, franchises for goodwill.

Based on the Reporting of Financial Accounting Standards (PSAK), the useful lives of various assets affected by amortization may not exceed 20 years. The reason is simple, because 20 years is a very long time, there is a possibility that assets valued during that period will no longer have economic value after 20 years.

depletion

If in the previous explanation we have understood the explanation between tangible and intangible assets. So, in this type of amortization, assets experience a real decrease that consumes benefits and materials.

A simple example of a depleted asset is a company’s natural resources. In accounting, assets that are natural resources decline in value, and during the same period, these assets continue to experience a decrease in physical value.

How to calculate accumulated depreciation

There are several ways to calculate this accrual, including the straight-line method and the declining balance method. Based on the accumulated depreciation from the EMBA journal, the following is the accumulated depreciation formula:

Straight line method

Depreciation expense is calculated on a straight-line basis, using the assumption that each asset can provide a reasonable contribution or benefit, without fluctuations over its useful life.

The rate of decline in these assets will be the same every year, so the value of these assets will be deducted from their value in use. For this reason, this method is suitable when used to calculate the depreciation of fixed assets where wear and tear will not be affected by the finished product.

The formula for calculating it is as follows:

D = (AC – SV)/LT

Information:

D = depreciation

AC = acquisition price

SV = residual value

LT = economic life

Declining balance method

The declining balance method is based on the assumption that each fixed asset has the potential to make a significant contribution at the outset of its use. As the economic life decreases, the degree of decline in asset function will also increase.

This method is suitable for asset classes where usage will be affected by the volume of product produced. The formula for calculating this decreasing balance is as follows:

D = d% x BV

d% = 1 – n√SV/AC

Information:

D = depreciation

d% = depreciation rate

BV = previous book price

SV = residual value

AC = acquisition price

Should be used in cost calculations and also for accumulated depreciation if it can be adjusted to the type of assets used in the calculation.

In addition, the consistency of using this method will also make depreciation expense easier to measure and record in financial reports, both income statements and balance sheets, using mathematics will be more accurate.

The difference between depreciation expense and accumulated depreciation

After we know the depreciation expense together, the method is different, do you know the difference between depreciation expense and accumulated depreciation?

Basically, the difference between the two is the time period. Accumulated depreciation is the total accumulated depreciation expense for one period or one year. This account has a deduction that in the first year the accumulated depreciation will equal the depreciation expense of business property in one year.

However, for the second year or so, you can get the accumulated depreciation from the first year by adding up the accumulated depreciation of the second year. You just need to credit it to a reconciliation account, whether it’s office equipment, transportation, or other assets that are in a depreciable condition.

Accumulating Wealth By Investment

There are several advantages of investing over saving a certain amount, where the investment can always grow in the future. A simple example, when depositing 1 million in a savings bank, there won’t be much addition. In contrast to investment, with 1 million it will grow by about 20% per year. This proves that investing can be an option to accumulate wealth quickly.