Brief Definition
The amortized cost method is an accounting technique used to gradually write down the value of a financial asset or liability over time. This method involves spreading out the cost of an asset or liability over its useful life, considering both the initial cost and any interest or principal repayments.
Further Explanation
The amortized cost method is an accounting technique used to gradually write down the value of a financial asset or liability over time. This method involves spreading out the cost of an asset or liability over its useful life, considering both the initial cost and any interest or principal repayments. This is commonly applied to loans, bonds, and other financial instruments to provide a more accurate reflection of their value on financial statements.
Example:
Suppose a company issues a bond with a face value of $1,000 and a discount price of $950. The company will use the amortized cost method to gradually adjust the bond’s value from $950 to $1,000 over the bond’s life. If the bond matures in 5 years, the company will amortize the $50 discount over this period, incrementally increasing the bond’s book value on its balance sheet.