Technical or economic depreciation of assets
Desde un punto de vista económico-contable, los fondos de amortización son aquellos que se crean para compensar la pérdida de valor o depreciación que experimentan ciertos elementos patrimoniales. Los fondos de amortización se crean por las dotaciones que se realizan cada año por un determinado importe, de tal forma que al final de la vida económica del bien amortizado, la empresa podrá reponerlo con la acumulación de las dotaciones efectuadas.
La dotación anual es el reflejo contable de la depreciación que sufren los activos, que recibe el nombre de amortización.
Desde el punto de vista lingüístico la expresión depreciación es más apropiada para reflejar la pérdida de valor de los activos materiales (también llamados bienes de uso). Sin embargo, las normas contables de algunos países eligen la expresión amortización.
Economic sense of asset depreciation
Amortization has a very clear economic meaning for the company, given that if it did not charge the depreciation (loss in value) experienced by its fixed assets over the course of the year in the income statement, the benefit would be fictitious, since at the end of its useful life the fixed assets would have disappeared and the company would have become impoverished (or decapitalized, in technical terms). On the other hand, if the company's balance sheet only recorded the fixed assets in gross terms (that is, the acquisition price of the fixed assets), the asset would not reflect the value of the company's assets and property rights at that time, but rather the value of the assets when they were acquired, which obviously can be very different.
The following factors intervene in establishing an amortization policy:
a) The acquisition price of the fixed assets, which includes all additional expenses for their installation and putting them in condition.
b) The useful life of the fixed assets. It is the smallest of the following three lives:.
- Technical life (obsolescence): a machine can be in perfect working condition but can be replaced with economic advantage by a second machine that performs the same function better (typical examples are computers or electronic devices).
- Commercial life: the product, in whose intervention the fixed assets intervene, may have been replaced by another obtained through different procedures.
c) The residual value of the fixed assets at the end of their useful life, which is frequently estimated to be zero.
d) The amortization method used to distribute the cost of the fixed assets between the accounting periods that constitute their useful life.
e) The basis of amortization, that is, whether the amortization aims to cover either the original cost of the fixed assets, or this same cost updated with a price index that indicates the loss of value of money in periods of inflation, or the replacement cost of the fixed assets.
Causes of amortization
Economic amortization includes the depreciation of an asset. Amortization is the quantification of the depreciation suffered by the assets that make up the assets of a company.
This depreciation can be caused by three causes:
Amortization from an accounting point of view
Amortizing means considering that a certain element of business fixed assets has lost, due to the mere passage of time, part of its value. To reflect this fact in accounting terms, and in accordance with the double-entry accounting method, it is necessary to:
1º Provide amortization, that is, consider the decrease in value experienced as a loss for the year.
2º Create a negative account in the assets of the balance sheet, which would see its balance increase annually with the indicated decrease in the value of the asset. In this way, every element of the company's fixed assets would be reflected by two accounts, one positive, which would collect the value of its acquisition or obtaining, and another negative (called Accumulated Amortization), which indicates what is worth less as a result of the passage of time.
This is an accounting device aimed at achieving a closer approximation to the economic and financial reality of the company, and not a fund of money reserved in some way to replace the property at the end of its useful life. To calculate the amortization fee for a given period, there are different methods:
Amortization methods
There are several methods for calculating amortization of immobilized assets (fixed, increasing, decreasing installments,...). These are arithmetic techniques to distribute a certain amount, the value to be amortized, into several installments, corresponding to several periods.
When discussing the different amortization methods, we must first refer to some concepts related to the ways of calculating amortization.
Lohmann Ruchti Effect
Amortization, in principle, fulfills the function of guaranteeing the maintenance of the company's productive capacity, but according to the Lohmann Ruchti effect, in certain cases amortization can contribute to increasing the company's productive capacity.
For this effect to be fulfilled, the following requirements must be met:
If the previous assumptions are met, the funds released through the amortization process can be dedicated to acquiring new production units, which allow the productive expansion of the company.