What is Amortization?

Amortization is the systematic process of gradually reducing a debt or the value of an intangible asset over a specific period. It applies to both loan repayments and intangible assets like patents, copyrights, and goodwill.

How Amortization Works

For Loans:

• Repay both principal and interest in scheduled installments over the loan term. For Intangible Assets:

• Spread the acquisition cost of intangible assets over their useful life as a non-cash expense.

Example

A company takes a $500,000 loan with a 5-year term. Each monthly payment includes interest and a portion of the principal. Separately, it amortizes a $100,000 patent over its 10-year legal life.

Benefits

• Smoothens expense recognition over time

• Reduces taxable income through non-cash deductions

• Helps businesses manage debt and asset value