What is Amortization?

Published by Thomas Herold in Accounting, Investments

'Amortization' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The word amortization is one that is commonly utilized by financial officers of corporations and accountants. They utilize it when they are working with time concepts and how they relate to financial statements of accounts. You typically hear this word employed when you are figuring up loan calculations, or when you are determining interest payments.

The concept of amortization possesses a lengthy history and it is currently employed in numerous different segments of finance. The word itself descends from Middle English. Here amortisen meant to “alienate” or “kill” something. This derivation itself comes from the Latin admortire that signified “plus death.” It is loosely related to the derivation of the word mortgage, as well.

This accounting principle is much like depreciation that diminishes a liability or asset’s value over a given period of time through payments. It covers the practical life span of a tangible asset. With liabilities, it includes a pre-set amount of time over which money is paid back. Like this, a certain amount of money is set aside for the loan repayment over its lifetime.

Even though depreciation is similar to amortization, they are not the same concepts. The main difference between them lies in what they cover. While depreciation is most commonly employed to describe physical assets like property, vehicles, or buildings, amortization instead covers intangibles such as product development, copyrights, or patents. Where liabilities are concerned, it relates to income in the future that will be paid out over a given amount of time. Depreciation is instead a lost income over a time period.

Several different kinds of amortization are presently in use. This varies with the accounting method that is practiced. Business amortization deals with borrowed funds and loans and the paying of particular amounts in different time frames. When used as amortization analysis, this is the means of cost execution analysis for a given group of operations. Where tax law is concerned, amortization pertains to the interest amount that is paid over a given span of time relevant to payments and tax rates.

Amortization can also be employed with regards to zoning rules and regulations, since it conveys a property owner’s time for relocating as a result of zoning guidelines and pre-existing use. Another variation is used as negative amortization. This pertains specifically to increasing loan amounts that result from total interest due not being paid up at the appropriate time.

Amortization can also be employed over a widely ranging time frame. It could cover only a year or extend to as many as forty years. This depends on the kind of loan or asset utilized. Some examples include building loans that span over as many as forty years and car loans that commonly span over merely four to five years. Asset examples would be patent right expenses that commonly are spread out over seventeen years.

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The term 'Amortization' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.