Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of

principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academic officer of a university A university ( la, universitas, 'a whole') is an educational institution, institution of higher ...

and

interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

. To amortise a loan means "to kill it off". In accounting, amortization refers to charging or writing off an

intangible asset An intangible asset is an asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economi ...

's cost as an

operational expense An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure (capex), is the cost of developing or provid ...

over its estimated useful life to reduce a company's taxable income.

Etymology

The word comes from Middle English ''amortisen'' to kill, alienate in

mortmain Mortmain () is the perpetual, inalienable ownership of real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an ...

, from Anglo-French ''amorteser'', alteration of ''amortir'', from

Vulgar Latin Vulgar Latin, also known as Popular or Colloquial Latin, is non-literary Literature broadly is any collection of written Writing is a medium of human communication Communication (from Latin ''communicare'', meaning "to share") is th ...

''admortire'' "to kill", from

Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the Roman Republic, it became ...

Latin

''ad-'' and ''mort-'', "death".

Applications of amortization

*When used in the context of a home purchase, amortization is the process by which loan principal decreases over the life of a loan, typically an

amortizing loan In banking A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital mark ...

. As each mortgage payment is made, part of the payment is applied as interest on the loan, and the remainder of the payment is applied towards reducing the principal. An

amortization schedule An amortization schedule is a table detailing each periodic payment on an amortizing loan (typically a mortgage loan, mortgage), as generated by an amortization calculator. Amortization refers to the process of paying off a debt (often from a loan ...

, a table detailing each periodic payment on a loan, shows the amounts of principal and interest and demonstrates how a loan's principal amount decreases over time. An amortization schedule can be generated by an

amortization calculator An amortization calculator is used to determine the periodic payment amount due on a loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned wi ...

Negative amortization In finance, negative amortization (also known as NegAm, deferred interest or Graduated payment mortgage loan, graduated payment mortgage) occurs whenever the loan payment for any period is less than the interest charged over that period so that the ...

is an amortization schedule where the loan amount actually increases through not paying the full interest. *In business,

amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academi ...

allocates a lump sum amount to different time periods, particularly for loans and other forms of finance, including related

or other finance charges. Amortization is also applied to capital expenditures of certain assets under accounting rules, particularly

intangible assets An intangible asset is an asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economi ...

, in a manner analogous to

depreciation In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in a ...

. *In

tax law Tax law or revenue law is an area of legal study in which public or sanctioned authorities, such as federal, state and municipal governments (as in the case of the US) use a body of rules and procedures (laws) to assess and collect tax A ...

in the United States,

refers to the cost recovery system for

intangible property Intangible property, also known as incorporeal property, is something that a person A person (plural people or persons) is a being that has certain capacities or attributes such as reason, morality, consciousness or self-consciousness, and bein ...

. *In

computer science Computer science deals with the theoretical foundations of information, algorithms and the architectures of its computation as well as practical techniques for their application. Computer science is the study of computation, automation, a ...

amortized analysis In computer science Computer science deals with the theoretical foundations of information, algorithms and the architectures of its computation as well as practical techniques for their application. Computer science is the study of Algorit ...

is a method of

analyzing Analysis is the process of breaking a complexity, complex topic or Substance theory, substance into smaller parts in order to gain a better understanding of it. The technique has been applied in the study of mathematics and logic since before Ari ...

the execution cost of

algorithms In mathematics Mathematics (from Greek: ) includes the study of such topics as numbers ( and ), formulas and related structures (), shapes and spaces in which they are contained (), and quantities and their changes ( and ). There is no ...

over a sequence of operations. *In the context of zoning regulations, amortization refers to the time period a non-conforming property has to conform to a new zoning classification before the non-conforming use becomes prohibited. For example, if the city rezones property from industrial to residential and sets an amortization period of one year, all property within the rezoned boundary must move from industrial use to residential use within one year. *In the context of Securitization the Joshua Curve relates to a unique amortization profile that results in the innovative "horseshoe Shape" or "J Shape" weighted average life ("WAL") distribution. In other words, if the base case results in a WAL of 10.0 years, the stress case and performance case would both result in reduced WALs that are both less than 10.0 years due to accelerated amortization.

References

External links

*{{Wiktionary-inline Debt Tax law Depreciation

Etymology

Applications of amortization

See also

References

External links