In accounting, amortization refers to the practice of spreading out the expense of an asset over a period of time that typically coincides with the principle asset’s useful life. Amortizing an expense is useful in determining the true benefit of a large expense as it generates revenue over time. The amounts of each increment of a spread-out expense as reported on a company’s financials define amortization expenses. Amortization practices reflect a more accurate cost of doing business in a company’s financial reporting, as the benefits of an initial expense may continue long after the initial report of that expense.
A broader amortization definition includes the process of gradually paying off the loan balance over a set amount of monthly payments and in fixed increments, commonly seen in home mortgages and auto loans.
What is the difference between depreciation and amortization?
The difference between amortization and depreciation is that amortization is used for intangible assets, while depreciation is used for tangible assets.
What formula do I use to calculate amortization?
Here is the formula to calculate amortization.
- A = payment Amount per period
- P = initial Principal (loan amount)
- r = fixed interest rate per period
- n = total number of payments or periods