﻿

"For other uses of Amortization, see the Amortization disambiguation page."Amortization is the distribution of a single lump-sum cash flow into many smaller cash flow installments, as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both and interest. Amortization is chiefly used in loan repayments (a common example being a mortgage loan) and in sinking funds. Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end.

The amortization calculator formula is::$P ,=,Acdotfrac\left\{1-left\left(frac\left\{1\right\}\left\{1+r\right\} ight\right)^n\right\}\left\{r\right\}$,

where: "P" is the principal amount borrowed, "A" is the periodic payment, "r" is the periodic interest rate divided by 100 (annual interest rate also divided by 12 in case of monthly installments), and "n" is the total number of payments (for a 30-year loan with monthly payments "n" = 30 × 12 = 360).

Negative amortization (also called deferred interest) occurs if the payments made do not cover the interest due. The remaining interest owed is added to the outstanding loan balance, making it larger than the original loan amount.

Accounting

In accounting, amortization refers to expensing the acquisition cost minus the residual value of intangible assets (often intellectual property such as patents and trademarks or copyrights) in a systematic manner over their estimated useful economic lives so as to reflect their consumption, expiration, obsolescence or other decline in value as a result of use or the passage of time.

A corresponding concept for tangible assets is depreciation. Methodologies for allocating amortization to each accounting period are generally the same as for depreciation. However, many intangible assets such as goodwill or certain brands may be deemed to have an indefinite useful life and are therefore not subject to amortization.

Amortization is recorded in the financial statements of an entity as a reduction in the carrying value of the intangible asset in the balance sheet and as an expense in the income statement.

Under International Financial Reporting Standards, guidance on accounting for the amortization of intangible assets is contained in [http://www.iasb.org/NR/rdonlyres/E52C2F1A-DA51-4CFC-A363-9E84920D6EED/0/IAS38.pdf International Accounting Standard 38, Intangible Assets] . Under United States generally accepted accounting principles (GAAP), the primary guidance is contained in [http://www.fasb.org/pdf/fas142.pdf Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets] .

ee also

*Annuity (finance theory)
*Appreciation
*Cash taxes
*Depletion (accounting)
*EBITDA
*List of real estate topics

* [http://www.ofdict.com/definition/amortization.php Amortization general details in simple terms]
* [http://bretwhissel.net/amortization/amortize.html Multiple Variable amortization calculator]

Wikimedia Foundation. 2010.

### Look at other dictionaries:

• Amortization — or amortisation is the process of decreasing, or accounting for, an amount over a period of time. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo French amorteser , alteration of amortir , from Vulgar Latin… …   Wikipedia

• Amortization calculator — An amortization calculator is used to determine the periodic payment amount due on a loan (typically a mortgage), based on the amortization process. The amortization repayment model factors varying amounts of both interest and principal into… …   Wikipedia

• amortization — I noun clearance, defrayal, defrayment, disbursement, discharge, extinction of a debt, extinguishment of claim, liquidation of a debt, payment, remittance, satisfaction associated concepts: amortization contract, amortization of a mortgage,… …   Law dictionary

• Amortization (tax law) — In tax law, amortization refers to the cost recovery system for intangible property. Although the theory behind cost recovery deductions of amortization is to deduct from, basis in a systematic manner over their estimated useful economic lives so …   Wikipedia

• amortization — /am euhr teuh zay sheuhn, euh mawr /, n. 1. an act or instance of amortizing a debt or other obligation. 2. the sums devoted to this purpose. Also, amortizement. [1665 75; < ML a(d)mortization (s. of admortizatio). See AMORTIZE, ATION] * * * In… …   Universalium

• amortization — (1) The process of making regular, periodic decreases in the book or carrying value of an asset. For example, when a bond is purchased at a price above 100, the difference between the purchase price and the par value, the premium, is amortized.… …   Financial and business terms

• Business-Agile Enterprise — A Business Agile Enterprise (B AE) is a new Business Architecture that maximizes asset reuse and horizontal integration across lines of business. A B AE is a company that has mastered the interrelationships between business and Information… …   Wikipedia

• Amortization Of Intangibles — A tax term relating to the practice of deducting the cost of an investment in a qualifying non tangible asset over the projected life of the asset. The cost basis of the qualifying intangible asset is amortized over a 15 year period, irrespective …   Investment dictionary

• business finance — Raising and managing of funds by business organizations. Such activities are usually the concern of senior managers, who must use financial forecasting to develop a long term plan for the firm. Shorter term budgets are then devised to meet the… …   Universalium

• Earnings before interest, taxes, depreciation and amortization — (EBITDA) is a non GAAP metric that can be used to evaluate a company s profitability.::EBITDA = Operating Revenue – Operating Expenses + Other RevenueIts name comes from the fact that Operating Expenses do not include interest, taxes, or… …   Wikipedia