To carry out a amortization it is necessary to apply formulas, perform calculations and more, relating different points regarding the process, it is required to have knowledge of them for their correct application, which will be highlighted in this information.
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Amortization
Amortization is the process that requires the economic and accounting areas to carry out a distribution on the expenses that are made over a period of time, in addition to this, it is highlighted that it can also be named as depreciation according to the areas in which it is used. . In general, the use that highlights this term is for control over assets and liabilities and their valuation.
It is necessary to take into account that in order to carry out amortization, it is necessary to apply formulas and carry out calculations in order to obtain the value that will be distributed over certain periods. Therefore, these types of processes or methods are used when there is a situation that requires making payments periodically, which may be the same or have some type of variation.
By carrying out each of the steps that are needed, each of the interests can be covered in order to make the payment and in this way the amounts that are given in the debt can be reduced more and more. For this reason, it is very important to know how an amortization is carried out, what formula is applied in order to obtain the required value.
Formula
For the calculation of an amortization, some points must be taken into account that allow it to be related to the value that is desired to be obtained, for this, the following is applied amortization formula:
- i= are the interests
- n= Is the number of payments made
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For the amortization application, it is important to know the types that it highlights, given that each one of them has a specific objective and from this, different methods can be carried out that allow acting in the correct way. Among the types of amortization, financial and economic stand out.
Financial
In the financial area, it is considered that the amortization process allows debts to be paid correctly. When a loan is obtained, it will be expressed as a liability, which must be repaid for a period of time from the cancellation in small amounts. This can generally occur when the loan occurs from a bank or other cases.
In order to carry out the distribution of an amount over a period of time, various methods can be used, which are the German, American and French systems, they are very useful for accounting since they are based on various interests. When these types of loan agreements are given, the system that will be used must be established, therefore, it is important to know how each of them works, highlighting relevant points.
- The French is in charge of determining a fixed amortization, which is obtained from certain calculations that relate each of the interests with respect to the quota that is expressed as capital, which is highlighted as an increasing amortization and the interest is decreasing.
- The German system highlights a fixed type of amortization on the part of the capital, which means that both the installment and the interest are expressed as decreasing. A characteristic point is that payments are made in advance annually.
- In the case of the American, a single type amortization is highlighted, which is expressed at the end of a loan, then interest payments are made within the term of the loan. One point to take into account is that if capital payments are not made as intermediaries, then the interest will be fixed annually.
Economic or Technical
In the economic area, amortizations are required so that some type of loss in equity due to some type of situation can be remunerated or compensated. Therefore, amortizations are created for the realization of an amount on an annual basis, in this way the economy can be kept stable from each of the provisions made.
When some difficulty is highlighted in the assets of a company, the amortization used as depreciation is highlighted because some loss is being highlighted in it due to the assets it presents.
The assets in a company can be affected for various reasons. All actions that are carried out economically must have control and must be carried out correctly, whether for purchases, expenses, payments to workers and others, they cannot have errors. As part of these examples we recommend reading about how to read a payslip
economic sense
For a company the amortization It is of such importance for its economy, to the point that it allows it to take care of each of the losses that its assets may suffer, allowing it to see benefits in the future. If there is no activation from amortization, then the assets will not work properly, which will lead to the company's economy being in its worst state.
Similarly, it should be considered that the company can register its fixed assets according to the price at which they were obtained, then the assets would not be exposed with the value in relation to the assets and rights that the company owns, but would only be with the acquisition value. These types of actions are directly reflected in the economic balance of a company, taking into account that there are many factors that influence, which are:
- The prices of the fixed assets when they were acquired, which cover each one of the interests for the installation of the same.
- The life of fixed assets can be physical, technical and commercial. In the case of the technique, it stands out that it is in its best state, but it is replaced for the benefit of the economy by another that fulfills its functions. And in the case of the commercial company, it stands out that the fixed asset is exchanged for another that was acquired in a different way.
- Fixed assets have a residual value that is generally nil since that is when their useful life ends.
- The methodology used to be able to distribute the cost for the established period of time
- Amortization has a base, which covers an initial cost in relation to fixed assets, which when updating its price will highlight the loss suffered in its value.
Causes
In addition to clarifying what is amortization, a point of high importance are the causes for which it occurs, in the economic area its activation is required so that control of the depreciation shown can be carried out, which means that it allows the loss suffered to be quantified in relation to the goods that make up the assets of an entity. Therefore, points are highlighted for which an amortization is made:
- When depreciation occurs physically, due to wear and tear of an asset over the years
- Functional losses since the goods have not been used correctly to be able to fulfill their objective
- With respect to economic activities that highlight depreciation due to the constant development of new products that are better than those currently owned, which makes this good obsolete.
accounting point of view
When an amortization is carried out, it is because an asset has highlighted a loss, either due to its conditions over time, valuation and more. In order for these situations to be reported correctly, the accounting area in charge of this process must be highlighted, considering the following points that must be applied:
- First of all, the loss suffered due to some decline in the value of the asset must be considered.
- Create an account that details the assets, this is done annually, the account must be expressed in a negative way to indicate that the value decreased. From this step, all the elements that are displayed as an asset will be highlighted in two accounts, the positive one where it indicates the value to be able to obtain it, and the negative one to indicate that the value has decreased over the years.
It is important that these steps are carried out so that the accounting area highlights with greater accuracy the economic situation of the entity or company, which means that it is not only necessary to express what is the fund that is possessed in order to be able to solve situations that highlight the assets. as time goes by. To comply with this, it will be necessary to know the application of various methods and the use of amortization tables.
Methods
In order to carry out the amortization calculations, different methods can be applied that allow it to be obtained efficiently. The methods are various arithmetic-type techniques, which lead to the distribution that must be made, considering what the interest value is, the necessary installments, the time period and more.
When specialized people make use of these methods, they must take into account various terms that are related in the process and that are necessary to know in order to fulfill the objective. Then, for the calculation of an amortization, it is necessary to know the following terms:
- The useful life that an asset exhibits, having knowledge of the duration of a good is of high importance for economic stability since it will be activated at the time it is required without any problem
- The amortization base indicates the difference that an asset presents with respect to its value when it was acquired with its value over time.
- The type of amortization, which allows to know the percentage that must be applied in the amortization base and in this way to have knowledge of the annual amortization value
By knowing each of these terms, the calculation of amortization will be efficient, for this the methods that can be used are highlighted:
- A fixed installment amortization, which indicates that the same installment of the amortization will be assigned annually
- The declining amortization in relation to the percentage that reflects the value that will be amortized
- Decreasing amortization based on the sum of certain values, the asset has a useful life, to which a value will be assigned, from then on, annually in the amortization quota, the division of that value with respect to the sum must be applied. of all amortization values
- Variable rate amortization
- Amortization of progress
- Accelerated rate amortization
- Varied amortizations
Lohmann Ruchti effect
This effect indicates that amortizations influence the production capacities of an entity, given that they allow it to increase significantly. But for this effect to be fulfilled, it is important that certain points are exercised, which are:
- There must be a phase of increase of the entity or company, in which it is highlighted that a quantity of goods is needed for production
- The division of the production team, by adding new equipment will allow production to be much more efficient and can significantly increase
- The models of the equipment are of high importance, it is necessary that they be updated so as not to have only obsolete equipment
It is recommended to comply with each of these points, so that what is desired can be obtained, in this way each of the funds that highlights the amortization can be established specifically to be able to obtain new equipment for the production of a company, in such a way that it does not highlight any type of loss or suffer falls in its economy.
Then, from the application of the Lohmann Ruchti Effect, it will allow the goods not to suffer from obsolescence, which means that the time elapsed in relation to the life of the equipment will not have to be considered, since its capacity will not decrease nor will the duration of them, allowing economic stability to be maintained.
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The processes that require both assets and liabilities in a company are of high importance, since you must have control of these values for economic stability, if you are interested in it, we recommend reading about how to calculate the value of a company