DEFINITION of 'Amortization'

1. The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.

2. The spreading out of capital expenses for intangible assets over a specific period of time (usually over the asset's useful life) for accounting and tax purposes. Amortization is similar to depreciation, which is used for tangible assets, and to depletion, which is used with natural resources. Amortization roughly matches an asset’s expense with the revenue it generates.


Loading the player...

BREAKING DOWN 'Amortization'

1. With auto loan and home loan payments, at the beginning of the loan term, most of the monthly payment goes toward interest. With each subsequent payment, a greater percentage of the payment goes toward principal. For example, on a 5-year, $20,000 auto loan at 6% interest, the first monthly payment of $386.66 would be allocated as $286.66 to principal and $100 to interest. The last monthly payment would be allocated as $384.73 to principal and $1.92 to interest. At the end of the loan term, all principal and all interest will be repaid.

2. Suppose XYZ Biotech spent $30 million dollars on a patent with a useful life of 15 years. XYZ Biotech would record $2 million each year as an amortization expense.

The IRS allows taxpayers to take a deduction for the following amortized expenses: geological and geophysical expenses incurred in oil and natural gas exploration, atmospheric pollution control facilities, bond premiums, research and development, lease acquisition, forestation and reforestation, and certain intangibles such as goodwill, patents, copyrights and trademarks. Amortization can be calculated easily using most modern financial calculators, spreadsheet software packages such as Microsoft Excel or amortization charts and tables.

  1. Capital Expenditure (CAPEX)

    Capital expenditure, or CapEx, are funds used by a company to ...
  2. Amortization Schedule

    A complete schedule of periodic blended loan payments, showing ...
  3. Depreciation, Depletion and Amortization ...

    A method of accounting associated with the acquisition, exploration ...
  4. Economic Life

    The expected period of time during which an asset is useful to ...
  5. Copyright

    The ownership of intellectual property by the item's creator. ...
  6. Intangible Asset

    An asset that is not physical in nature. Corporate intellectual ...
Related Articles
  1. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  2. Markets

    A Clear Look At EBITDA

    This measure has its benefits, but it can also present earnings through rose-colored glasses.
  3. Investing Basics

    Patents Are Assets, So Learn How To Value Them

    Innovation is the key to staying on top. Find out how companies protect their ideas and how to figure out how much they're worth.
  4. Home & Auto

    Re-Amortizing Or Refinancing Your Home

    Re-amortization is a lesser known alternative to refinancing when it comes to dealing with your mortgage.
  5. Investing


    Amortization and depreciation are two ways to prorate the cost of an asset's life. Learn more about the former and how it it's calculated.
  6. Personal Finance

    Can You Count On Goodwill?

    Carefully examine goodwill and its sources before considering the value of your investment.
  7. Options & Futures

    EBITDA: Challenging The Calculation

    This measure has a bad rap, but it's still a valuable tool when used appropriately.
  8. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  9. Credit & Loans

    Mortgage Basics

    Learn how to navigate what may be your biggest and most important loan.
  10. Economics

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  1. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  2. What are typical examples of capitalized costs within a company?

    Typical examples of capitalized costs are expenses associated with constructing a fixed asset and include materials, sales ... Read Full Answer >>
  3. How can I calculate the carrying value of a bond?

    The carrying value of a bond is the net amount between the bond’s face value and any unamortized premiums or minus any amortized ... Read Full Answer >>
  4. Which financial statement can I find noncurrent assets on?

    The value of a company's noncurrent assets is located on its balance sheet. Noncurrent assets are a company's resources that ... Read Full Answer >>
  5. How are mezzanine loans structured?

    Mezzanine loans are a combination of debt and equity finance, most commonly utilized in the expansion of established companies ... Read Full Answer >>
  6. What kinds of events or circumstances will increase or decrease the proportion of ...

    An acquisition is one type of event which substantially increases the number and value of intangible assets that a company ... Read Full Answer >>
  7. What does amortization mean in the context of a pension plan?

    There are two primary needs for amortization within the context of a company's pension plan. The first instances might include ... Read Full Answer >>
  8. How does goodwill amortize?

    Per the Financial Accounting Standards Board (FASB) Statement 142, Accounting for Goodwill and Intangible Assets, goodwill ... Read Full Answer >>
  9. How does one amortize intangible assets?

    Intangible assets are identifiable but not physical. These assets commonly consist of intellectual property and include such ... Read Full Answer >>
  10. What are the differences between revolving credit and installment credit?

    There are two fundamental types of credit repayments: revolving credit and installment credit. While any type of loan can ... Read Full Answer >>
  11. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!