Amortization has two common uses in finance. In lending, it refers to the scheduled reduction of a loan's outstanding principal through regular payments that also cover interest. In accounting, amortization is the systematic expensing of the cost of an intangible asset over its estimated useful life, typically under GAAP (Generally Accepted Accounting Principles).
A loan amortization schedule shows, for each payment, the portion that goes to interest and the portion that reduces principal, as well as the remaining balance after each payment. At the start, interest is higher and declines over time while principal repayment increases, assuming a fixed payment amount. The schedule helps borrowers plan cash flow and lenders estimate total interest paid over the term.
Under GAAP, intangible assets such as patents, licenses, or software costs are amortized, usually using the straight-line method, meaning the cost is allocated evenly across the asset's useful life. Amortization expense appears on the income statement, and accumulated amortization reduces the asset's carrying amount on the balance sheet. Some assets are tested for impairment instead of amortized, and the useful life estimates can be revised if circumstances change.
Amortization differs from depreciation, which applies to tangible assets. Some assets may have finite useful lives; others may be indefinite, and in those cases, amortization may not apply.
A 30-year fixed-rate mortgage follows an amortization schedule where each monthly payment partly covers interest and principal, causing the loan balance to shrink over time.
depreciation · amortization schedule · intangible assets · amortization expense · principal · interest