Business glossary
Amortization
The systematic allocation of an intangible asset or loan amount over time.
Example
An intangible asset costing $6,000 with an assumed three-year useful life and no residual value would have $2,000 of annual straight-line amortization. A loan amortization schedule instead separates each repayment into principal and interest.
How it differs from related terms
Asset amortization and loan amortization describe different calculations. Asset amortization allocates a cost to accounting periods; loan amortization reduces a debt balance. Keep the asset policy or loan schedule with the calculation.
Frequently asked questions
What is an example of amortization?
An intangible asset costing $6,000 with an assumed three-year useful life and no residual value would have $2,000 of annual straight-line amortization. A loan amortization schedule instead separates each repayment into principal and interest.
How should amortization be interpreted?
Asset amortization and loan amortization describe different calculations. Asset amortization allocates a cost to accounting periods; loan amortization reduces a debt balance. Keep the asset policy or loan schedule with the calculation.