Managing amortization is crucial for accurate financial reporting and tax compliance. This is where NetSuite makes your life easier.
With a comprehensive solution to streamline this process, NetSuite’s amortization features help businesses gain a clear financial picture. Here’s what you should know about the key elements of NetSuite’s amortization to supercharge your financial management.
What is Amortization?
Amortization is the process of allocating the cost of intangible assets and prepaid expenses over their useful life. Loans and equipment are good examples of amortization transactions in a manufacturing business. With a loan, amortization spreads payments over a specified period, whereas with equipment, you apply amortization as depreciation.
Understanding Amortization in NetSuite
In NetSuite, amortization plays a key role in ensuring accurate financial reporting and tax compliance. Using NetSuite accounting software can facilitate this process, reducing the risk of errors and making it easier for your finance team to stay on top of amortization schedules.
To manage amortization effectively, businesses can use NetSuite templates and create corresponding journal entries. Amortization templates define the parameters for distributing the cost of intangible assets over their useful life, which can be applied to multiple expense accounts.
Amortization journal entries allow you to accurately post deferred expenses, commonly calculated using the straight-line method. This method distributes the intangible asset’s cost evenly across all accounting periods, ensuring a consistent and accurate accounting process.
Amortization vs Depreciation
Amortization and depreciation are both accounting techniques that comply with the Generally Accepted Accounting Principles (GAAP) matching principle.
However, they are applied to different types of assets: depreciation is used for tangible assets, while amortization is applied to intangible assets and loan repayments.
There are two methods of amortization:
- Straight-line, which expends the value of an asset in equal amounts over its useful life
- Accelerated, which writes off a larger portion of the cost in earlier years, decreasing the book value of the asset at a faster rate.
NetSuite has two types of amortization templates: standard and variable.
The standard amortization template is more commonly utilized, whereas a variable amortization template is employed for percent-complete recognition when the Project Management feature is enabled.
Building an Amortization Schedule in NetSuite
NetSuite allows users to create and manage amortization schedules generated for purchase transactions containing items or expense lines that have associated amortization templates.
Amortization schedules determine the posting periods in which expenses should be recognized and the amount to be recognized in each period, making it easier to track and report on amortized expenses.
Amortization schedules in NetSuite are generated upon saving the purchase transaction. Routing of vendor bills must be enabled for the amortization schedule to be generated. This will only happen once the bill is approved.
Amortization schedules can be deleted in NetSuite, provided no associated journal entries exist. If journal entries are present, they must be deleted first.
Amortization Templates: An Overview
Amortization templates in NetSuite ensure consistency across all amortized items by specifying the parameters of the amortization schedule generated by the acquisition of an item. These templates help standardize the process, reducing the risk of errors and improving overall financial reporting.
To set up amortization templates in NetSuite, users must configure the template, indicate the amortization period, and define the amortization start date. The amortization template determines the following:
- The method used to set the terms to post the expense from the net purchase amount
- Number of periods to defer the commencement of the amortization schedule for a line
- Expense amount to be recognized, either as a percentage or a currency value.
When creating amortization templates, users must also select a deferral account, which is a deferred expense type account for posting purposes.
Generating Amortization Journal Entries
NetSuite automates the generation of amortization journal entries, simplifying the accounting process and reducing potential errors.
Amortization journal entries document the allocation of an intangible asset’s cost over time, consisting of a debit to the amortization expense account and a credit to the accumulated amortization or intangible asset account.
Deferral Account and Deferred Expenses
Deferral accounts and deferred expenses play a vital role in the amortization process in NetSuite, ensuring accurate financial reporting.
Deferral accounts record deferred expenses until they are transferred to the expense account through an amortization journal entry according to the established schedule.
When the amortization feature is enabled in NetSuite, a deferred expense type account is added to the Chart of Accounts. Each amortization must have one of these accounts assigned. Businesses can maintain accurate financial records and comply with tax regulations by effectively managing deferral accounts and expenses.
Tracking Amortized Expenses and Balances
NetSuite enables users to track amortized expenses and remaining balances in real time, providing greater visibility and control over financial data. This allows businesses to monitor the payments and balances of loans or mortgages over time, ensuring accurate financial reporting.
Posting Periods and Amortization Periods
Posting periods and amortization periods in NetSuite help users manage the timing of amortization entries and ensure accurate reporting. The posting period regulates the timing of financial transactions for general accounting purposes, while amortization periods control the timing of amortization entries.
Users can manage posting periods in NetSuite by navigating to Setup > Accounting > Manage Accounting Periods. Amortization periods can be managed by navigating to Setup > Accounting > Manage Amortization Periods, where they are used to control the timing of amortization entries.
Streamlining Prepaid Expense Management with NetSuite Amortization
NetSuite’s amortization features streamline prepaid expense management, making it easier for finance teams to track and account for expenses that are paid in advance but will be consumed in the future, such as rent, insurance premiums, and subscription fees.
Ensuring these expenses are accurately recorded and acknowledged in the relevant accounting period is essential for maintaining a clear financial picture.
NetSuite Amortization: An All-in-One Finance Solution
NetSuite’s amortization features offer a comprehensive solution for managing amortization, ensuring accurate financial reporting, tax compliance, and efficient management of intangible assets and loan repayments. It leaves the hard work and calculations to the software and empowers your finance team to focus on more strategic tasks and analysis.
If leveling up your financial systems is part of your yearly goals, reach out to one of our industry experts on the StratusGreen team. We take a tailored approach to consulting focused on adding value to your company and becoming an extension of your NetSuite support team.
