A Short Look At Amortization

Amortization The process of amortization occurs when a business decreases or accounts for an amount over a period of time. In business, amortization refers to the provision of a lump sum amount to different time periods, mainly for loans and other forms of finance, including related interest and other finance charges. An amortization schedule is a table detailing each periodic payment on a loan, as generated by an amortization calculator.

The amortization calculator formula is:

where P is the principal amount borrowed, A is the periodic payment, r is the periodic interest rate divided by 100 and n is the total number of payments. Negative amortization occurs if the payments made do not cover the interest due.

The chief difference between amortization and depreciation is the nature of the items to which the terms apply. Buildings, machinery, equipment and other tangible assets depreciate, while amortization is more frequently associated with intangible assets such as patents, copyrights, capitalized costs and goodwill. These intangible assets can be of benefit to a business for many years, so the cost of accruing them should be spread across the entire time period that the company is likely to use or generate revenue from them.