Amortizing

Amortizing is the process of spreading an asset’s cost or a loan’s repayment over a period of time. In accounting and finance, amortization refers to the systematic allocation of a cost over its useful life or term, reducing the carrying amount on the balance sheet and affecting income statements through periodic expense or interest recognition.

Loan amortization: For a fixed-rate loan, repayments are typically scheduled to fully repay the principal and interest by the end of the term. Each payment covers both interest on the outstanding balance and a portion of the principal. In the early years, interest dominates; over time, principal share increases. A fully amortizing loan has no remaining balance at maturity; if payments fall short, negative amortization or a balloon may occur.

Intangible asset amortization: Amortization applies to intangible assets with finite useful lives, such as patents, licenses, or software. The asset’s cost is allocated as an expense over its estimated useful life, commonly using straight-line depreciation. The annual amortization expense reduces the asset’s carrying value and may affect tax deductions; impairment or revaluation may alter the carrying amount if conditions change.

Distinctions: Amortization is contrasted with depreciation, which allocates the cost of tangible assets over their useful lives. In lending, the term also describes the gradual repayment of principal, whereas depreciation is used for physical assets and impairment considerations govern further write-downs of intangible assets.