What does 'amortization' refer to in financial accounting?

Amortization specifically refers to the process of gradually writing off the initial cost of an intangible asset over its useful life. This accounting method allows a company to systematically allocate the costs associated with intangible assets—such as patents, trademarks, and goodwill—over the period they are expected to provide economic benefits.

By using amortization, businesses can better match the expense of the intangible asset with the income it generates, thus adhering to the matching principle in accounting. This helps ensure that financial statements accurately reflect the company’s financial position and performance.

In contrast, the other options pertain to different concepts. The full depreciation of tangible assets deals with physical assets and not intangibles, while the calculation of retained earnings is about equity cases in the balance sheet. Finally, setting aside funds for future liabilities relates to provisioning, which is distinct from amortization. Each of these concepts plays a different role in financial accounting, highlighting the specificity of what amortization entails.