Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time[4]. Here are some key points related to amortization:
- In accounting, amortization refers to expensing the acquisition cost minus the residual value of intangible assets in a systematic manner over their estimated "useful economic lives" so as to reflect their consumption, expiry, and obsolescence, or other decline in value as a result of use or the passage of time[1].
- Amortization is recorded in the financial statements of an entity as a reduction in the value of the asset[1].
- A mortgage amortization schedule is a table that lists each regular payment on a mortgage over time[2]. Part of each payment goes toward the loan principal, and part goes toward interest. As the loan amortizes, the amount going toward principal starts out small and gradually grows larger month by month[2].
- Amortization can also refer to the practice of spreading out capital expenses related to intangible assets over a specific duration—usually over the asset’s useful life—for accounting and tax purposes[4].
- Amortization as a way of spreading business costs in accounting generally refers to intangible assets like a patent or copyright[3]. Under Section 197 of U.S. law, the value of these assets can be deducted month-to-month or year-to-year[3].
- Loan amortization only considers the principal and doesn’t include interest[5]. An amortization schedule for a loan is a list of estimated monthly payments. For each payment, you'll see the amount going toward principal and the amount going toward interest[6].
Citations:
[1] wikipedia
[2] bankrate
[3] calculator
[4] investopedia
[5] santander
[6] creditkarma
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