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What Is Amortization?

Amortization is the practice of repaying debt in predetermined, periodic payments, which include capital and interest. Amortization is an accounting approach to reducing the amount of debt or intangibles over a predetermined period.

When it comes to a loan, amortization refers to the process of spacing out repayment.

Deeper Definition

An amortization procedure makes installment payments to lower the existing balance on a debt, such as a mortgage or a vehicle loan.

Amortization is identical to depreciation applied to an asset.

Second, for accounting and tax reasons, amortization may also refer to the spacing out of capital costs associated with intangible assets over a defined time—usually the asset’s service life.

Amortization of a loan is the process of repaying debt in total over some time. When a loan is first offered to an individual, there are always predetermined payment schedules that the person who gets the loan is accountable for adhering to.

The loan’s principal and interest payments will change from month to month, but the payment amount will remain consistent with each payment cycle.

Amortization has a distinct meaning in intangible assets that aren’t physical, such as branding, intellectual property, and trademarks. In this respect, amortization is the gradual decrease in the asset’s value over time.

Fixed/tangible assets (machines, land, and buildings) lose value over time when they are acquired and used.

Amortization Example.

For example, a corporation paid $180,000 to an external inventor for unrestricted ownership of a technical product that the man invented. The corporation paid $20,000 to register the invention, which gave the company 20 years of ownership from the creator.

Other inventors raised objections to the patent’s claim after learning of the sale. However, the corporation successfully protected the patent though the company needed to pay $50,000 in legal expenses.

Patent capitalized cost = $250,000. i.e $180,000 + $20,000 + $50,000

The year for use is 20

A yearly amortization expenditure of $250,000 divided by 20 is $12,500.

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