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What is Amortization?
If the full cost of the asset was recognized in the period it was purchased, then that year’s expenditure would be unfairly overstated while expenditure throughout the remaining years, which were still obtaining benefits from that asset would not be affected and therefore understated.
Fixed assets depreciate for two main reasons:1) Wear and tear: i.e; a car will decrease in value because of the wear on tires, body, etc. or because of the mileage, and many other factors.
2) Obsolescence: Assets often decrease in value as they are replaced by better and newer models. Car model from last year is less valuable this year because a newer model has been released.
Impairment LossA loss that represents a permanent decrease in value of the asset.
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