Amortization Definition
The term amortization is used in a variety of contexts, but most commonly it refers to the process of repaying a debt. In the case of loans, amortization is the distribution of each loan payment into two parts: interest and principal. The interest portion of the payment is used to pay the lender for the use of their money, while the principal portion is used to reduce the outstanding balance of the loan. Over time, as more and more of the payments are applied to the principal, the loan balance decreases until it is paid off entirely.
Amortization can also refer to the gradual write-off of intangible assets such as goodwill or patents. Intangible assets are not physical in nature and have a limited useful life. As such, they cannot be depreciated like a piece of machinery or office space. Instead, they are amortized over their useful life, meaning that a small portion of their cost is charged against income each year until they are fully written off.
