What does amortisation mean in economics? Why do sports clubs say, for example, that they cannot sell a player because they paid 100M for him and he is not yet amortised?
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Businesses spend a lot of time and effort to keep track of how they are spending money, and is the business becoming more valuable or not.
Suppose a business buys a $1M machine for their factory. Are they $1M poorer? No, they traded $1M in cash for a machine worth $1M. The value of the business did not change. However, eventually that machine will wear out and become worthless. When, we do not know exactly, but we make a guess. Let’s say 10 years. To keep things simple, the business will say that it has lost $100,000 in value every year it owns the machine. This is amortization. We amortize the $1M cost of the machine over it 10 year life.
To the business, this is just like if you or I bought something on a payment system, and it takes 10 years to pay it off.
Now, suppose the machine becomes worthless after 5 years. It wears out, or becomes obsolete, or whatever. The business can throw it away, but it is still on their books as an asset worth $500,000. So if they throw the machine away, they no longer have an $500,000 asset, and they take a charge of $500,00 against their profits.
Now, substitute football player for machine, and you can see how a team might find it expensive to let a player go. If they cannot sell him for the remaining estimated value, they will take a hit to their bottom line.
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