Amortization
The gradual reduction of a loan balance or spreading the cost of an intangible asset over its useful life.
Amortization has two meanings: for intangible assets (patents, trademarks, software), it spreads acquisition cost over useful life as an expense—similar to depreciation for tangible assets. For loans, it refers to paying down principal through scheduled payments. In early loan payments, more goes to interest; over time, more reduces principal.
Formula
Annual Amortization (Intangible Asset) = Cost of Asset ÷ Useful LifeExample
A software company acquires a patent for $50,000 with a 10-year life and amortizes it at $5,000 per year, recording that as annual expense.
Why It Matters for Your Business
Amortization affects reported expenses and asset values, and for loans, understanding the schedule helps you plan payments and total interest cost.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
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