Amortization

Amortization is the systematic allocation of the cost of a resource over time. In accounting, it typically refers to allocating the cost of a finite-lived intangible asset over its estimated useful life. In lending, amortization describes the schedule by which a debt is repaid through periodic payments. The common thread is that value or cost is consumed gradually rather than at a single point.

Loan amortization involves a regular, often fixed, payment that covers both interest and principal. Each payment reduces the outstanding loan balance, with the proportion shifting over time from interest toward principal. The payment amount can be computed from the loan amount, interest rate, and term; a standard monthly payment is given by a formula that depends on the rate and number of payments.

For intangible assets with a finite useful life, amortization is the systematic expensing of the asset's cost over that life. The expense reduces net income and, on the balance sheet, accumulated amortization reduces the asset's carrying value. Useful life estimates and residual values influence the amount recognized each period. In accounting standards, finite-lived intangibles are amortized; indefinite-lived intangibles are not. Straight-line is the most common method; other approaches may be used if they reflect the pattern of expected benefits. Tax regulations may also permit or require amortization deductions.

Amortization differs from depreciation, which applies to tangible fixed assets. While both involve expensing over time, amortization concerns intangibles or certain loan costs, whereas depreciation covers physical assets. The term is widely used in financial reporting and reflects how costs or values are allocated progressively over time.