11/6/2015

Power Economics and Management

2nd Semester, 3rd Year (13EL)  Amortization

B.E Electrical Engg. Program
 Accounting

Nayyar Hussain  Auditing

Assistant Professor

Lecturer No. 22
Department of Electrical Engineering
Mehran University of Engg. & Technology,
Jamshoro.

Amortization Amortization

 The word amortize comes from the Latin word admoritz which
means “bring to death”.
 Amortization is a process of allocating cost over the useful life of
(intangible assets), similar to depreciation.
 Amortization is the systematic write-off of the cost of an
intangible asset over its useful or legal life, whichever is shorter.
Amortization is the same concept as depreciation only we call it
a different name because it refers to intangible assets.
 Goodwill and trademarks have unlimited (or indefinite) lives and
are not amortized.
 Intangibles with a limited life, such as patents and copyrights,
are subject to amortization.
 In banking and finance amortization refers amortizing the
loan where the principal of the loan is paid down over
the life of the loan (that is, amortized) according to an
amortization schedule , typically through equal payments.
 Each payment to the lender will consist of a portion of
interest and a portion of principal.
 The calculations for an amortizing loan are those of an
annuity using the time value of money formulas, and can
be done using an amortization calculators.

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Amortizing Loans Payment formula

 The important factors related to an amortized loan  Let P be present value or full amount of loan, r is
are the principal, annual interest rate, the length of the annual interest rate, t is the length of the loan
the loan and the monthly payment. and PMT is the monthly payment.
If any 3 of the above factors are known, the fourth

P  12r  1  12r 


can be found.
12 t

PMT 
 Amortization tables have been created so that

[(1  12r )12t  1]

people don’t need to use the complicated payment
formulas.

Example - Amortization Table at 10%

 What is the monthly payment for a loan of $29,000 What would be the payment on a loan of $58,000 at 10%
for 5 years at an annual interest rate of 5%. annual interest for 30 years?

 1  
Amount 5 10 15 20 25 30 35 40

29000  .05 (12 )( 5 ) years years years years years years years years

PMT 
.05
12 12
[(1   1]
100 2.13 1.33 1.08 0.97 0.91 0.88 0.86 0.85

12 )
.05 (12 )( 5 ) 200 4.25 2.65 2.15 1.94 1.82 1.76 1.72 1.70
500 10.63 6.61 5.38 4.83 4.55 4.39 4.30 4.25
 The monthly payment is $547.27 1000 21.25 13.22 10.75 9.66 9.09 8.78 8.60 8.50
 Note: If you follow this schedule, you will make 60 2000 42.50 26.44 21.50 19.31 18.18 17.56 17.20 16.99
payments of $547.27 which in total is $32836.20. 5000 106.24 66.08 53.74 48.26 45.44 43.88 42.99 42.46
The amount of interest paid to the lender is 10000 212.48 132.16 107.47 96.51 90.88 87.76 85.97 84.92
$32836.20 - $29000 = $3836.20 20000 424.95 264.31 214.93 193.01 181.75 175.52 171.94 169.83
50000 1062.36 660.76 537.31 482.52 454.36 438.79 429.84 424.58
100000 2124.71 1321.51 1074.61 965.03 908.71 877.58 859.68 849.15

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Accounting
 Accounting - a process of identifying, recording,
summarizing, and reporting economic information to
decision makers in the form of financial statements
Financial accounting - focuses on the specific needs

of decision makers external to the organization, such
as stockholders, suppliers, banks, and government
agencies
The Nature of Accounting
 Accounting systems are designed to meet the needs
of the decisions makers who use the financial
information.
Every business has some sort of accounting system.

 These accounting systems may be very complex or very
simple, but the real value of any accounting system lies
in the information that the system provides.
11/6/2015
The Nature of Accounting
 The accounting system is a series of steps performed to
analyze, record, quantify, accumulate, summarize,
classify, report, and interpret economic events and their
effects on an organization and to prepare the financial
statements.
Accounting as an Aid to Decision Making
 Accounting information is useful to anyone who
makes decisions that have economic results.
• Managers want to know if a new product will be profitable.
Owners want to know which employees are productive.
•
• Investors want to know if a company is a good investment.
• Creditors want to know if they should extend credit, how much
to extend, and for how long.
• Government regulators want to know if financial statements
conform to requirements.
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Accounting as an Aid to Financial and Management

Decision Making Accounting
 Fundamental relationships in the decision-making  The major distinction between financial and
process: management accounting is the users of the
information.
 Financialaccounting serves external users.
 Management accounting serves internal users, such as
Accountant’s
top executives, management, and administrators within
Financial organizations.
Event analysis & Users
Statements
recording

The Balance Sheet The Balance Sheet

Sections of the balance sheet: The balance sheet equation:
 Assets - resources of the firm that are expected to

increase or cause future cash flows (everything the Assets = Liabilities + Owners’ Equity
firm owns)
 Liabilities - obligations of the firm to outsiders or
or
claims against its assets by outsiders (debts of the Owners’ Equity = Assets - Liabilities
firm)
 Owners’ Equity - the residual interest in, or remaining
claims against, the firm’s assets after deducting
liabilities (rights of the owners)

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Auditing Auditing

Auditing is a systematic process of

objectively obtaining and evaluating evidence
regarding assertions about economic actions
and events to ascertain the degree of
correspondence between these assertions and
established criteria and communicating the
results to interested users.

Difference in Accountants and Auditors Roles of Auditors and Management

 To be an accountant, it is necessary to have

accounting knowledge.
 Understand business transactions

 Know what information to capture

 Know controls needed for activity and

information
 Be able to report it for various purposes

 Be able to record it according to accounting

standards By giving an opinion on financial statement fairness and
ICFR effectiveness the auditor is indirectly reporting on
 To be an auditor, it is also it is necessary to know management’s assertions.

audit processes and audit reporting

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The Auditing Process Beneficiaries of Audits

 Management produces financial statements and ICFR

report
 Auditor gathers and evaluates evidence
 Many forms of evidence; anything the auditor uses

 Auditor uses established standards to compare

evidence to the financial statements and ICFR report
 Looks for correspondence between what is presented
and the underlying evidence
 Uses processes described/required in auditing
standards.
 Auditor issues report

THANKS