Amortization

Amortization, in its most common usage, references the gradual repayment of debts over a specified time period.  The term is most commonly used when referencing mortgage repayment terms and refers to the repayment of pricipal and interest.

Amortization & Loan Repayment


The amount of the payment that will be required each period will depend on the amortization schedule that is chosen.  For instance, a 30 year amortization schedule will spread the principal repayment and interest charges over a 360 period term.  An amortization schedule will show you how much principal and interest is being applied to each payment as time moves forward.  Remember, you can only be charged interest on the outstanding loan balance; therefore, as your outstanding principal balance comes down over time, so do the interest payments.  You may ask, why does my monthly payment not move lower then?  By design, the amortization schedule reduces your outstanding principal balance at an accelerated rate as you continue to make payments.  Basically, the amount of periodic interest savings will applied to your principal balance.

If you would like to understand how your payments would break down; we have a great calculator which will do all the work for you.

Click Here For Amortization Calculator

Amortization & Asset Write Offs


Amortization can also be used in the context of business tax write-offs.  Amortization in this sense refers to the expensing of capital expenses over their expected useful lives.  Amortization can only be used in the context intangible assets such as patents, copyrights, or intellectual property; however, there are certain items such as goodwill which do not have any definite lifespan and therefore will not be subject to amortization.

In accounting terms, amortization reduces the assets carrying value on the balance sheet and adds as an expense on the income statement.

When you talk about physical assets such as machinery or office space, the appropriate terminology for expensing these assets is depreciation.
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