Before we can talk about this concept, it is important that we remember what the concept of accounting amortization means, which is nothing more than the way in which the depreciation of an asset is quantified (due to the passage of time, obsolescence or impairment) for the accounting of an organization.
The increasing book depreciation method has a lot to do with the book depreciation concept: assets, assigning to each year of useful life a correlative number corresponding to the series of natural numbers in an increasing way.
This method of amortization means that there are increasingly larger amortization installments. In this way, in the first years the asset will depreciate through a much lower depreciation expense than the following years, having an increasing trend over the years.
Calculation of the increasing repayment rate (and example)
In order to better understand how the amortization fee is calculated, it is better that we see it with an example of how it is done, explaining, in turn, the formula.
First of all, we must consider what good we will have to amortize and if we will use the increasing amortization. When we are clear about it, we must assess how long it should be amortized and what is the amount to be amortized. The amortization fee is calculated:
Cuota amortización creciente (año x) = Valor adquirido/Suma digitos de años x dígito correspondiente al año
Let's take an example: a car at a price of € 20 is to be amortized in 000 years. The acquired value will be € 3; the sum of the digits of years will be 20000 (6 + 1 + 2, if it had been 3 years the result would be 4 = 10 + 1 + 2 + 3); and, finally, the digit of the corresponding year will be the one in which we are.
The respective amortization installments per year are:
- Year 1: 20000/6 x 1 = 3333'33 €
- Year 2: 20000/6 x 2 = 6666'66 €
- Año 3: 20000/6 x 3 = 10000 €
If we add the respective to each year we will obtain the amount of € 20000, which is the amount to be amortized and the initial cost of the vehicle.