amortization

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Amortization, an accounting concept similar to depreciation, is the gradual reduction of the value of an asset or liability by some periodic amount (i.e., via installment payments). In the case of an asset, it involves expensing the item over the "life" of the item—the time period over which it can be used. For a liability, the amortization takes place over the time period that the item is repaid or earned. Amortization is essentially a means to allocate categories of assets and liabilities to their pertinent time period.

The key difference between depreciation and amortization is the nature of the items to which the terms apply. The former is generally used in the context of tangible assets, such as buildings, machinery, and equipment. The latter is more commonly associated with intangible assets, such as copyrights, goodwill, patents, and capitalized costs (e.g. product development costs). On the liability side, amortization is commonly applied to deferred revenue items such as premium income or subscription revenue (wherein cash payments are often received in advance of delivery of goods or services), and therefore must be recognized as income distributed over some future period of time.

Amortization is a means by which accountants apply the period concept in accrual-based financial statements: income and expenses are recorded in the periods affected, rather than when the cash actually changes hands. The importance of spreading transactions across several periods becomes more clear when considering long-lived assets of substantial cost. Just as it would be inappropriate to expense the entire cost of a new facility in the year of its acquisition since its life would extend over many years, it would be wrong to fully expense an intangible asset only in the first year. Intangible assets such as copyrights, patents, and goodwill can be of benefit to a business for many years, so the cost of accruing such assets should be spread over the entire time period the company that the company is likely to use the asset or generate revenue from it.

The periods over which intangible assets are amortized vary widely, from a few years to as many as 40 years. (The costs incurred with establishing and protecting patent rights, for example, are generally amortized over 17 years.) The general rule is that the asset should be amortized over its useful life. Small business owners should realize, however, that not all assets are consumed by their use or by the passage of time, and thus are not subject to amortization or depreciation. The value of land, for instance, is generally not degraded by time or use (indeed, the value of land assets often increases with time). This applies to intangible assets as well; trademarks can have indefinite lives and can increase in value over time, and thus are not subject to amortization.

The term amortization is also used in connection with loans. The amortization of a loan is the rate at which the principal balance will be paid down over time, given the term and interest rate of the note. Shorter note periods will have higher amounts amortized with each payment or period.

Further Reading:

Davis, Jon E. "Amortization of Start-Up Costs." The Tax Advisor. April 1999.

Pollack, Sheldon D. "Amortization of Intangible Assets in a Business Acquisition." Taxation for Accountants. June 1997.

The reduction of a debt incurred, for example, in the purchase of stocks or bonds, by regular payments consisting of interest and part of the principal made over a specified time period upon the expiration of which the entire debt is repaid. A mortgage is amortized when it is repaid with periodic payments over a particular term. After a certain portion of each payment is applied to the interest on the debt, any balance reduces the principal.

The allocation of the cost of an intangible asset, for example, a patent or copyright, over its estimated useful life that is considered an expense of doing business and is used to offset the earnings of the asset by its declining value. If an intangible asset has an indefinite life, such as good will, it cannot be amortized.

Amortization is not the same as depreciation, which is the allocation of the original cost of a tangible asset computed over its anticipated useful life, based on its physical wear and tear and the passage of time. Amortization of intangible assets and depreciation of tangible assets are used for tax purposes to reduce the yearly income generated by the assets by their decreasing values so that the tax imposed upon the earnings of assets is less. Amortization differs from depletion, which is a reduction in the book value of a natural resource, such as a mineral, resulting from its conversion into a mar- ketable product. Depletion is used for a similar tax purpose as amortization and depreciation — to reduce the yearly income generated by the asset by the expenses involved in its sale so that less tax will be due.

• Banking and Financial Services - amortization: paying off of debt in installments over time, with each payment covering current interest and part of principal
• Income Tax - amortization: method of deducting intangible expenses by prorating them over fixed period, similar to depreciation

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Look up amortise in Wiktionary, the free dictionary.

Amortization (or amortisation) is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.

When used in the context of a home purchase, amortization is the process by which your loan principal decreases over the life of your loan. With each mortgage payment that you make, a portion of your payment is applied towards reducing your principal and another portion of your payment is applied towards paying the interest on the loan. An amortization table shows this ratio of principal and interest and demonstrates how your loan's principal amount decreases over time.

Amortization is generally known as depreciation of intangible assets of a firm.

Applications of amortization

• Amortization (business), the allocation of a lump sum amount to different time periods, particularly for loans and other forms of finance, including related interest or other finance charges.
  • Amortization schedule, a table detailing each periodic payment on a loan (typically a mortgage), as generated by an amortization calculator.
  • Negative amortization, an amortization schedule where the loan amount actually increases through not paying the full interest
• Amortized analysis, analyzing the execution cost of algorithms over a sequence of operations.
• Amortization of capital expenditures of certain assets under accounting rules, particularly intangible assets, in a manner analogous to depreciation.
• Amortizing loan
• Amortization (tax law)

Amortization is also used in the context of zoning regulations and describes the time in which a property owner has to conform or relocate when the property's use constitutes a preexisting nonconforming use under amended zoning regulations.

References

See also

• Depreciation

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Dansk (Danish)
n. - amortisation, afskrivning, amortisering

Nederlands (Dutch)
amortisatie, afschrijving

Français (French)
n. - amortissement

Deutsch (German)
n. - Tilgung, Amortisation, Abschreibung

Ελληνική (Greek)
n. - (οικον.) χρεολύσιο, χρεολυσία, απόσβεση

Italiano (Italian)
deprezzamento, ammortamento, ammortizzamento

Português (Portuguese)
n. - amortização (f) (Fin.)

Русский (Russian)
выплата в рассрочку, погашение долга в рассрочку

Español (Spanish)
n. - amortización

Svenska (Swedish)
n. - amortering

中文（简体）(Chinese (Simplified))
摊还, 摊销, 分期偿付, 分期偿还

中文（繁體）(Chinese (Traditional))
n. - 攤還, 攤銷, 分期償付, 分期償還

한국어 (Korean)
n. - 상환[금]

日本語 (Japanese)
n. - 割賦償還, 不動産譲渡, 償還

العربيه (Arabic)
‏(الاسم) تقسيط‏

עברית (Hebrew)
n. - ‮בלאי, פחת‬

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