Amortization
Amortization refers to spreading out the cost of a loan or an intangible asset over a set period of time.
In simple terms: ito yung unti-unting pagbabayad ng utang or unti-unting pag-record ng gastos for things you can’t physically touch (like software, trademarks, or franchise fees).
For loans, amortization means your monthly payments cover both the principal (utang) and interest.
For intangible assets, amortization means recording a portion of the asset’s cost as an expense each year.
Why Amortization Matters
For Filipino MSMEs, amortization is important because it helps you:
- Understand loan payments — especially for business loans, equipment loans, or franchise financing
- Plan cash flow — predictable monthly payments make budgeting easier
- Track asset value — especially for software, trademarks, or franchise fees
- Compute real profit — by spreading costs properly instead of recording them all at once
- Prepare for BIR compliance — amortization is part of allowable deductions
Many small businesses in the Philippines take loans for equipment, renovations, or expansion. Understanding amortization helps you avoid surprises and manage your finances better.
Example / Context
Example 1 (Business Loan):
You borrow ₱100,000 from a bank, payable in 12 months.
Each monthly payment includes a portion of the principal + interest.
This monthly breakdown is called loan amortization.
Example 2 (Franchise Fee):
You pay ₱200,000 for a franchise fee valid for 5 years.
Instead of recording ₱200,000 as an expense immediately, you record ₱40,000 per year.
This is amortization of an intangible asset.
Example 3 (Software Subscription):
You buy a 3‑year accounting software license for ₱18,000.
You record ₱6,000 per year as amortization expense.
Related Terms
FAQs
1. What’s the difference between amortization and depreciation?
Amortization is for intangible assets (software, franchise fees).
Depreciation is for physical assets (equipment, vehicles).
2. Does amortization reduce taxes?
Yes. Amortization is an allowable expense, which reduces your taxable income.
3. Is amortization only for loans?
No. It also applies to intangible assets that lose value over time.
4. Do all MSMEs need to record amortization?
Not always. But if you have loans, franchise fees, or long-term software licenses, amortization is required for proper accounting.