Mastering Amortization Flow in NetSuite

Introduction to Amortization:

This blog is all about understanding how NetSuite handles the financial concept of "amortization." It's an important concept in finance that helps businesses manage their money wisely. Here, we'll explore how NetSuite makes amortization simple and useful and how amortization works with NetSuite can make your job easier and help your business grow.

What is Amortization?

Amortization involves systematically reducing the recorded value of a loan or intangible asset over a defined period through periodic adjustments. It allows businesses to accurately account for the costs associated with their assets over time, promoting transparency and informed decision-making in financial management.

Here are some essential aspects of amortization:

1. Purpose: The purpose of amortization is to methodically decrease the recorded value of an intangible asset over time.
2. Methods: Different methods can be used to amortize assets, such as straight-line, declining balance, or units of production. The chosen method depends on factors like the asset's nature and expected pattern of use.
3. Automation: NetSuite automates the calculation and posting of amortization entries based on predefined schedules or rules. This reduces manual effort and ensures accuracy in financial reporting.
4. Integration: Amortization calculations in NetSuite are integrated with general ledger functionality, ensuring that amortization expenses are properly recorded and reflected in financial statements.
5. Customization: Customization options within the amortization feature empower users to personalize schedules and methods to align with the unique characteristics of assets. Users can input specific details and parameters to ensure accurate and tailored accounting of amortization expenses over time.

 

Practical Standpoint: 

Amortization is an accounting process used for intangible assets or certain prepaid expenses to allocate their costs systematically over their estimated useful lives. Intangible assets such as patents, copyrights, and trademarks do not have a physical form to offer economic benefits in the future. Similarly, certain prepaid expenses like insurance premiums or rent are also subject to amortization. By spreading out the cost of these assets over time using methods like straight-line or declining balance, businesses ensure that their financial statements accurately reflect the gradual consumption or expiration of these assets. This helps maintain transparency and compliance in financial reporting by accurately reflecting the financial impact of these assets throughout their useful life.  In this blog, we’ll explore a step-by-step guide on how businesses can effectively manage amortization using NetSuite, including the initial setup requirements.

 

Step 1: Enabling Features for Amortization

Before diving into the amortization process, ensure that the necessary features are enabled in NetSuite. Here’s what needs to be done initially:

• Amortization:

The Amortization feature is used to spread out expenses over time. This allows you to allocate the expense gradually and recognize it incrementally as goods or services are utilized.

• Accounting Periods:

Select this option to utilize accounting periods to manage your transactions.

Step 2: Setting Preference for Amortization

Additionally, configure the amortization preference by navigating to:

 Setup > Accounting > Accounting Preferences

Step 3: Set Up Auto-Generated Numbers

Here, you will need to generate Auto-Generated Numbers specifically for Amortization Schedules. Within the Schedules subtab, you can activate and specify your numbering scheme for amortization schedules.

The amortization schedule serves as a structured plan detailing the periodic allocation of the cost of intangible assets or prepaid expenses over their useful lives.

Step 4: Set Up Deferred Expense Accounts

Deferred Expense Accounts: Deferred Expense Accounts refer to accounts used to record expenses that have been paid in advance but will be recognized as expenses over future accounting periods. These accounts are typically used for prepaid expenses such as insurance premiums, rent payments, or subscription fees that cover future periods.

Step 5: Setting up Amortization Templates

Amortization templates in NetSuite are essential tools that automate the systematic distribution of expense over time, ensuring accurate financial management. This functionality proves particularly beneficial in scenarios where businesses must allocate the cost of an intangible asset- such as copyrights, trademarks or software licenses over its estimated useful life. By leveraging these templates, organizations streamline their accounting processes and maintain transparency in financial reporting.

Here are the key fields that are typically required:

• Template Name: A unique identifier for the amortization template.
• Account (such as Deferral Account, Contra Account, or Target Account): This is the specific ledger account where the costs associated with amortization will be documented.
• Amortization Type (e.g., Straight-line, by even periods): Specifies how the amortization should be calculated.
• Amortization Period: Here you need to enter the number of periods over which the amount needs to be amortized.
• Period Offset: It tells how many periods to wait before starting to spread out the cost over time
• Start Offset: Indicate the number of periods to delay the beginning of recognition for a schedule.

Step 6: Generating Amortization Schedule

Amortization Schedule: An amortization schedule is a detailed plan that outlines how the expense or value of an asset is gradually spread out or reduced over its useful lifespan. It details the specific amounts to be recognized as expenses during each accounting period according to a predefined amortization method (e.g., straight-line, by even periods).

Creating an amortization schedule from a vendor bill in NetSuite involves several steps. Here's a simplified explanation:

• Go to the transaction record of the vendor bill in NetSuite.
• Complete all the required fields on the vendor bill record (e.g., subsidiary, location, account, amount).
• At the line level, choose the amortization template and specify the start and end dates for the amortization schedule.
• After entering all required information, save the vendor bill. After saving the vendor bill, a vendor record is generated. Click the edit button and adjust the approval status to 'Approved.
• Once the status shows as approved, the amortization schedule is automatically generated.

Step 7: Creating Amortization Journal Entries

Amortization Journal Entries: Amortization journal entries are created to accurately record expenses that are deferred over time.

In NetSuite, when creating amortization journal entries, several fields typically need to be filled out to ensure accurate recording of expenses. These fields include:

• Posting Period: It defines the accounting period during which the amortization expense should be recognized.
• Subsidiary: Choose the subsidiary that was assigned when the vendor bill was created.
• Select Individual Schedules: Utilize the Select Individual Schedules option to specify the method of generating journal entries. To generate a single journal entry, check the box labeled Select Individual Schedules. When you check the checkbox for a specific bill and click the 'Create Journal Entries' button, the system will record the amortized expense associated with that bill.

After clicking the 'Create Journal Entries' button, you will be redirected to the status page.

Navigate to the amortization schedule for that specific vendor bill. There, you can review how the selected period chosen during the amortization journal entry process has been amortized.

 

Conclusion:

In conclusion, navigating the amortization process in NetSuite provides businesses with a robust framework for managing expenses over time. By leveraging NetSuite’s intuitive interface and powerful features, organizations can streamline financial operations, ensure compliance with accounting standards, and gain valuable insights into financial performance. From setting up custom schedules to generating detailed reports, NetSuite equips users with the tools needed to optimize amortization practices and enhance overall financial transparency and efficiency. Embracing NetSuite’s comprehensive capabilities not only simplifies amortization workflows but also supports informed decision-making and strategic planning for long-term financial success.

 

Benefits of Using Blueflame Labs for Amortization Management in NetSuite:

Blueflame Labs can provide significant value to businesses looking to optimize their amortization processes within NetSuite. Here are some key benefits:

• Expertise and Customization: Blueflame Labs' team of experts can tailor NetSuite's amortization features to meet your specific business needs, ensuring accurate and efficient calculations.
• Process Optimization: Our consultants can help streamline your amortization workflows, reducing manual effort and minimizing errors.
• Compliance and Best Practices: Blueflame Labs can ensure that your amortization practices adhere to relevant accounting standards and best practices.
• Training and Support: We offer comprehensive training to help your team effectively use NetSuite's amortization features, and provide ongoing support to address any questions or issues.
• Integration with Other NetSuite Modules: Blueflame Labs can assist in integrating amortization with other NetSuite modules, such as general ledger and fixed assets, for a more holistic financial management solution.

Contact us today to learn more about how Blueflame Labs can help you optimize your amortization processes in NetSuite.