There are two general definitions for amortization. The first is the consistent repayment of a loan over time. The second is used in business accounting and refers to the act of spreading the expense of an expensive and long-lasting item over multiple time periods. The two are discussed in greater detail in the following sections.

Paying Off a Loan Over Time

When a borrower obtains a mortgage, vehicle loan, or personal loan, they often make monthly payments to the lender; these are some of the most prevalent examples of amortization. A portion of the payment covers the loan’s interest, while the remaining is used to reduce the principal amount outstanding. Interest is calculated based on the current amount owed, therefore it will drop as the principal decreases. The amortization chart illustrates this.

In contrast, credit cards are rarely amortized. They are an example of revolving debt, meaning that the outstanding balance can be continued from month to month and the amount repaid each month can be adjusted. Other loans that are not amortized include interest-only loans and balloon loans. The former has an interest-only period of payment, whereas the latter has a substantial principle payment upon loan maturity.

Amortization Schedule

An amortization schedule (also known as an amortization table) is a table that shows each periodic payment on an amortizing debt. Each estimate performed by the calculator will also include an annual and monthly amortization schedule above. Each installment for an amortized loan includes both an interest payment and a payment toward the principle balance, which changes by pay period. An amortization schedule indicates the particular amount that will be paid towards each, as well as the interest and principal paid to date and the remaining principle balance at the end of each payment period.

Although basic amortization schedules do not account for extra payments, this does not preclude borrowers from making additional payments on their loans. Furthermore, amortization schedules do not typically include costs. In general, amortization schedules are only applicable to fixed-rate loans, not adjustable-rate mortgages, variable-rate loans, or lines of credit.

Spreading Costs

Certain businesses may purchase pricey things that will be used for an extended length of time and are considered investments. Machinery, structures, and equipment are examples of commonly amortized items used to spread costs. From an accounting standpoint, purchasing a costly factory during a quarterly period can skew the financials, thus its value is amortized throughout the facility’s estimated life. Although technically considered amortizing, this is most commonly referred to as the depreciation expense of an asset amortized over its estimated lifetime.

In accounting, amortization is commonly used to spread business expenditures and pertains to intangible assets such as patents or copyrights. Section 197 of US tax law allows the value of certain assets to be deducted on a monthly or annual basis. A calculated amortization plan, like any other, can be used to estimate payment schedules. The following are intangible assets that are frequently amortized.

Goodwill is a quantifiable asset that represents a company’s reputation.

Going-concern value refers to the value of a business as an ongoing entity.

The existing workforce (current personnel, including their experience, education, and training).

Business books and records, operating systems, or any other information base, including lists or other information about existing or prospective consumers

Patents, copyrights, formulas, processes, designs, patterns, know-hows, formats, or similar items

Customer-based intangibles, such as customer bases and customer relationships.

Supplier-based intangibles include the value of future purchases due to current connections with vendors.

Licenses, permits, or other privileges issued by governmental units or agencies (including issuance and renewal)

Covenants not to compete or non-compete agreements entered into relation to the acquisition of interests in trades or enterprises

Franchises, trademarks, or trade names

Contracts for the use of or term interests in any of the goods listed below

Some intangible assets, the most common of which is goodwill, have indefinite useful lifetimes or are “self-created” and hence cannot be lawfully amortized for tax purposes.

According to the IRS under Section 197, some assets are not considered intangibles, such as interest in businesses, contracts, land, most computer software, intangible assets not acquired in connection with the acquisition of a business or trade, interest in an existing lease or sublease of a tangible property or existing debt, rights to service residential mortgages (unless acquired in connection with the acquisition of a trade or business), or certain transactions.

Amortizing Startup Costs

In the United States, business startup costs, defined as costs incurred to investigate the potential of creating or acquiring an active business, as well as costs to establish an active business, can only be amortized under certain conditions. They must be expenses that can be deducted as business expenses if incurred by an already operating business, and they must be incurred before the active business begins. These costs include consultation fees, financial analysis of potential acquisitions, advertising expenses, and personnel payments, all of which must be expended before the business is considered operational. According to IRS rules, initial startup costs must be amortized.