Amortize

Amortize is a term used in finance and accounting to describe the gradual reduction of a debt or the systematic allocation of the cost of an intangible asset over its useful life.

In lending, amortization refers to the process by which a loan is paid down over time through scheduled payments. Each payment typically covers both interest on the outstanding balance and a reduction of principal. In an amortizing loan, the balance declines to zero at the end of the term. An amortization schedule presents for each payment the total amount, the interest portion, the principal reduction, and the remaining balance.

In accounting, amortization is used for intangible assets with finite lives, such as patents, licenses, or software. The cost is allocated as amortization expense over the asset’s estimated useful life, usually by the straight-line method. For example, a 120,000 asset with a 10-year life and no residual value would incur 12,000 of amortization expense each year, reducing the carrying amount by 12,000 annually.

Assets with indefinite lives are not amortized; instead they may be tested for impairment and written down if their value falls.

Tax and reporting standards influence how amortization is applied. Accounting standards such as GAAP and IFRS prescribe amortization for finite-life intangibles, while tax rules vary by jurisdiction and may provide different periods or methods.