gradual reduction of an amount over time. Examples are amortized expenses on limited life intangible assets and deferred charges. Assets with limited life have to be written down over the period benefitted. The amortization entry is to debit amortization expense and credit the intangible asset. However, unlimited life intangibles are subject to an annual impairment test.
reduction in the value of an asset over the period owned; also the liquidation of debt through payments to a creditor or to a sinking fund.
- Banking. The payment of a loan by periodic payments of principal and interest, resulting in a declining principal balance and eventual repayment in full. This form of debt repayment is level payment amortization. Other methods have repayment schedules in which the early loan payments don't fully cover the interest due ( negative amortization).
Even though level payment amortization calls for the same payment in every installment, the loan payments are divided unequally between principal balance and interest owed. In the early years of a 30-year mortgage, a higher portion of early loan payments goes toward payment of interest than reducing the principal; as the loan is gradually paid down, an increasing portion of each payment is allocated to the principal until a zero-balance is eventually reached. See also add-on interest; amortization schedule; balloon mortgage; rebate; Rule of the 78's; simple interest. - Securities. An accounting process for adjusting the book value of bonds purchased above par value to the face value. Compare to accretion of discount.
- Accounting. A gradual reduction in book value of patents and other intangible assets. The preferred term for writing off fixed assets such as equipment is depreciation.
accounting procedure that gradually reduces the cost value of a limited life or intangible asset through periodic charges to income. For fixed assets the term used is depreciation, and for wasting assets (natural resources) it is depletion, both terms meaning essentially the same thing as amortization. Most companies follow the conservative practice of writing off, through amortization, intangible assets such as goodwill. It is also common practice to amortize any premium over par value paid in the purchase of preferred stock or bond investments. The purpose of amortization is to reflect resale or redemption value.
Discount and expense on funded debt are amortized by making applicable charges to income in accordance with a predetermined schedule. While this is normally done systematically, charges to profit and loss are permissible at any time in any amount of the remaining discount and expense. Such accounting is detailed in a company's annual report.
the systematic liquidation of a sum owed. A payment is charged at specific time intervals which will reduce the outstanding debt to zero at the end of a given period of time.
a gradual paying off of a debt by periodic installments.
Example: A $100,000 loan is arranged at an 8% interest rate. The borrower pays $10,000 in the first year. Of the payment, $8,000 is for interest, $2,000 for amortization. After the payment, the loan balance is amortized to $98,000.
