Amortization

Definition

Amortization is an accounting term used for two separate processes: Amortization of Loan and Amortization of Asset.

Amortization of Loan is the process of spreading out a loan into a series of fixed payments over a period of time, such as monthly loan payments. An individual will be pay off the loan’s interest and principal in different amounts each month, although the total payment remains equal each period.

Amortization of Asset, on the other hand, refers to the process of allocating the cost of intangible assets over a period of time. It reflects the consumption of an intangible asset over its useful life. These intangible assets could include: Patents, trademarks, copyrights, organizational cost, etc. Amortization is generally encountered by people while dealing with mortgages or car loans.

Explore Definition

Amortization kept simple

In simple words, amortized loan is the money you borrow from someone; however, that someone doesn’t want to give you the money without getting anything in return from you since everybody wants to make at least some profit in today’s world. So the person agrees to give you the amount you asked with a condition that you can take xyz time to return him back the money but in the mean time you have to work for him everyday for free.

How does Amortization apply to you

Suppose a company XYZ owns the patent for a product, and that patent lasts 20 years. If the company spent $15 million to develop the product, then it would record $1 million per year for 20 years as amortization expense on its income statement.

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